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Taxing and Subsidizing Foreign Investors

Rishi Sharma

No 2016-03, Working Papers from Department of Economics, Colgate University

Abstract: Many countries impose taxes on foreign investors while also having in place targeted subsidies and tax incentives that are designed to attract them. This paper shows that such a policy can be optimal from the standpoint of a host country. The government has an incentive to tax inframarginal firms because they are relatively immobile. It also has an incentive to subsidize marginal firms because the economic activity generated by such a subsidy can increase domestic wages in excess of the fiscal cost of the subsidy. These tax and subsidy policies improve host country welfare at the expense of foreigners. This analysis is thus able to provide an explanation for why tax coordination efforts can simultaneously entail reduced taxes and subsidies on foreign firms.

Keywords: international taxation; foreign direct investment; firm heterogeneity; tax competition (search for similar items in EconPapers)
JEL-codes: H87 H25 F23 (search for similar items in EconPapers)
Date: 2016-01-01, Revised 2017-05-25
New Economics Papers: this item is included in nep-dcm, nep-int, nep-pbe and nep-pub
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