Targeted Transfers, Investment Spillovers, and the Tax Environment

Lynne Pepall and Daniel Richards (dan.richards@tufts.edu)

No 702, Discussion Papers Series, Department of Economics, Tufts University from Department of Economics, Tufts University

Abstract: We examine the informational role of targeted tax transfers used by local governments to attract corporate investment projects. The transfer may potentially be used to solve an information externality in which subsequent investments that follow the initial project may fail to occur even though they are profitable. The targeted transfer may be used to signal the profitability of such ancillary investments and thereby attract them. We show that this signaling role implies that an environment of either generally high corporate tax rates or low gains from secondary investments paradoxically yields an equilibrium in which the necessary government subsidy is lower.

Keywords: taxes; transfers; externalities (search for similar items in EconPapers)
JEL-codes: H23 H25 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-pbe and nep-ppm
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