Commitment, Efficiency and Footloose Firms

King, Ian; Welling, Linda

doi:10.2307/2555066

Cited by 21 publications

(16 citation statements)

References 2 publications

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“…With discrete firm locations, we find the typical equilibrium for a second-price auction in which the equilibrium bid makes the loser indifferent between winning and losing. This result is comparable to the discrete firm location models of Black and Hoyt (1989), King and Welling (1992), and King, McAfee, and Welling (1993). It is interesting to note that Devereux, Lockwood, and Redoano (2001) find that OECD tax data is consistent with governments competing for discrete firms.…”

Section: Qedsupporting

confidence: 77%

Competition in taxes and performance requirements for foreign direct investment

Davies

Ellis

2007

European Economic Review

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Tax incentives offered to attract firms engaged in foreign direct investment are often tied to performance requirements such as domestic content restrictions. The tax competition literature has repeatedly shown that competition between municipalities for mobile firms tends to drive taxes to low levels. One would expect a comparable result for burdensome performance requirements. Despite this, the evidence suggests that while taxes have indeed been driven down, performance requirements are as popular as ever. We explain this seeming conundrum by showing that in the presence of spillovers, binding performance requirements can act as a coordination device for firms. In equilibrium, municipalities choose performance requirements which maximize joint surplus from investment. Competition between municipalities then transfers this surplus to firms via tax subsidies.

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Section: Qedsupporting

confidence: 77%

Competition in taxes and performance requirements for foreign direct investment

Davies

Ellis

2007

European Economic Review

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“…Our Model 1 in Section 2.2 is related to a variety of models in the literature where countries compete for foreign direct investments by o¤ering subsidies to …rms (Black and Hoyt, 1989, Bond and Samuelson, 1986, King and Welling, 1992, King, McAfee, and Welling, 1993, Haaparanta, 1996, Hau ‡er and Wooton, 1999. However, our focus is on the use of the tax system, rather than the use of subsidies, to induce relocation.…”

Section: Related Literaturementioning

confidence: 99%

Do countries compete over corporate tax rates?

Devereux

Lockwood

Redoano

2008

Journal of Public Economics

604

593

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This paper tests whether OECD countries compete with each other over corporate taxes in order to attract investment. We develop two models: with …rm mobility, countries compete only over the statutory tax rate or the e¤ective average tax rate, while with capital mobility, countries compete only over the e¤ective marginal tax rate. We estimate the parameters of reaction functions using data from 21 countries between 1983 and 1999. We …nd evidence that countries compete over all three measures, but particularly over the statutory tax rate and the e¤ective average tax rate. This is consistent with a belief amongst governments that location choices by multinational …rms are discrete. We also …nd evidence of concave reaction functions, consistent with the model outlined in the paper.Keywords: tax competition, corporate taxes, e¤ective average tax rate, e¤ective marginal tax rate. JEL Classi…cation Numbers: H0, H25, H77¤ The research reported here received …nancial support from the ESRC, and from the CSGR at Warwick University. We would like to thank Rachel Gri¢th and Lucy Chennells for help in assembling corporate tax data. We would also like to thank participants at the World Tax Competition conference at the IFS, the conference on Strategic Interaction among Local Governments at the Catholic University of Milan, the Workshop on Taxation and Public Debt at the University of Warwick's London O¢ce, and seminar participants at EPRU, University of Copenhagen, and the Universities of Exeter, Edinburgh, Keele, Oslo, Newcastle and Warwick for helpful comments. Non-Technical SummaryStatutory rates of corporation tax in developed countries have fallen substantially over the last two decades. The average rate amongst OECD countries in the early 1980s was nearly 50%; by 2001 this had fallen to under 35%. It is commonly believed that the reason for these declining rates is a process of tax competition: countries compete with each other by reducing their tax rates on corporate profit in order to attract inward flows of capital. Such a belief has led to increasing international coordination in an attempt to maintain revenue from corporation taxes. Both the European Union and the OECD introduced initiatives in the late 1990s designed to combat what they see as ''harmful'' tax competition. This paper examines whether there is any empirical evidence for such international competition in taxes on corporate income. Part of the reason for the lack of empirical work in this area to date is the difficulty in developing appropriate measure of taxation. Although there have been striking changes to statutory tax rates, there have also been important changes to the definitions of tax bases; broadly, tax bases have been broadened as tax rates have fallen.The corresponding drawback of most existing theory is that it does not adequately deal with the fact that governments have two broad instruments for determining corporate income taxes: the rate and the base. Almost exclusively, theoretical models combine this into a single ''effective...

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“…The MNE in King and Welling (1992) and King et al (1993) responds to this fact by trading its anticipated future tax payments to its host government for initial subsidies from that government while its FDI is still mobile. Our paper complements King and Welling (1992) and King et al (1993) by focusing on how the MNE strategically responds to the differential tax treatment of new versus established investment through its international relocation decision. Our modelling framework contains geographical change over time, giving governments the opportunity to bid in each period to attract or retain the MNE's FDI.…”

Section: Discussionmentioning

confidence: 99%

“…Unlike us, King and Welling (1992) and King et al (1993) downplay relocation issues and concentrate on the time profile of taxes paid in a given location. 3 The sunk nature of FDI limits mobility between periods and allows the first-period host nation to extract rents from the firm in the second period.…”

Section: Related Literaturementioning

confidence: 99%

Does tax competition make mobile firms more footloose?

Ferrett

Hoefele²,

Wooton

2019

Canadian J of Economics

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We examine a two‐period regional model with evolving economic geography, potentially creating incentives for firm relocation between periods. We argue that tax competition makes firms more footloose, but that this increases efficiency relative to the laissez‐faire outcome. We establish that: (i) tax competition leads to efficient investment outcomes and (ii) firm mobility is greater with tax competition than with a laissez‐faire regime. When relocation is costly, there can be too little mobility over time, as firms do not take into account the impact of FDI on social welfare in each country. With lump‐sum taxes or transfers, firms capture these benefits and internalize them, such that tax competition leads to the efficient outcomes. When more time periods are examined, tax competition induces firm relocation sooner than in its absence.

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Commitment, Efficiency and Footloose Firms

Cited by 21 publications

References 2 publications

Competition in taxes and performance requirements for foreign direct investment

Competition in taxes and performance requirements for foreign direct investment

Do countries compete over corporate tax rates?

Does tax competition make mobile firms more footloose?

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