Tax and public input competition

Tax competition and economic geography

Agnès Benassy-Quere, Nicolas Gobalraja and Alain Trannoy

Economic Policy, 2007, vol. 22, issue 50, 386-430

Abstract: The debate on tax competition lacks due attention when it comes to the provision of public goods used by firms in their production process. Indeed, firms may accept higher corporate taxation provided they enjoy good infrastructure and public services. We quantify such trade-off, i.e. the extent to which a ‘high tax, high public goods’ strategy is attractive to capital as compared to a ‘low tax, low public goods’ combination. We revisit and develop the popular model of tax competition introduced byZodrow and Mieszkowski (1986)) in a way that allows for the testing of its main prediction. The under-provision of public inputs can be tested econometrically by estimating and comparing two simple elasticities: capital with respect to the tax rate, and capital with respect to public inputs. We regress US foreign direct investment in 18 EU countries over 1994–2003 on several variables, including the corporate tax rate and the stock of public capital, used as a proxy for public input. Based on these estimations (−1.1 for the tax elasticity and +0.2 for the public input elasticity), we conclude that raising public input through an increase in the corporate tax rate reduces inward FDI, and that tax competition may indeed lead to an under-provision of public inputs. Furthermore, a ‘high’ equilibrium (high taxation and high level of public input) is not attainable for a country starting from a ‘low’ equilibrium unless households have a strong preference for public inputs. On the whole, the impact of tax competition may be more diverse than a mere ‘race to the bottom’.— Agnès Bénassy-Quéré, Nicolas Gobalraja and Alain Trannoy

Date: 2007
References: Add references at CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
http://hdl.handle.net/10.1111/j.1468-0327.2007.00179.x (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:ecpoli:v:22:y:2007:i:50:p:386-430.

Access Statistics for this article

Economic Policy is currently edited by Ghazala Azmat, Roberto Galbiati, Isabelle Mejean and Moritz Schularick

More articles in Economic Policy from CEPR, CESifo, Sciences Po Contact information at EDIRC., CES Contact information at EDIRC., MSH Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().