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CORPORATE TAX GAMES WITH CROSS‐BORDER EXTERNALITIES FROM PUBLIC INFRASTRUCTURE
Author(s) -
Dewit Gerda,
Hynes Kate,
Leahy Dermot
Publication year - 2018
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12516
Subject(s) - tax competition , externality , economics , competition (biology) , investment (military) , microeconomics , corporate tax , welfare , tax credit , public economics , indirect tax , double taxation , tax reform , tax avoidance , international economics , monetary economics , market economy , politics , ecology , political science , law , biology
We construct a model of corporate tax competition in which governments also use public infrastructure investment to attract foreign direct investment, thus enhancing their tax bases. In doing so, we allow for cross‐border infrastructural externalities. Depending on the externality, governments are shown to strategically over‐ or underinvest in infrastructure. We also examine how tax cooperation influences investment in infrastructure and find that welfare may be lower under tax cooperation than under tax competition; this is the case when infrastructure is very effective in raising the tax base and generates a large negative cross‐border externality. ( JEL F23, H40)