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Coordination of tax policies toward inward foreign direct investment
Author(s) -
Glass Amy Jocelyn,
Saggi Kamal
Publication year - 2014
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12029
Subject(s) - foreign direct investment , multinational corporation , attractiveness , international economics , economics , monetary economics , tax competition , production (economics) , corporate tax , business , international trade , indirect tax , tax avoidance , market economy , tax reform , macroeconomics , psychology , finance , psychoanalysis
We study competition for foreign direct investment (FDI) between host countries and the implications of tax policy coordination between them. By reducing its tax on multinational production, a host country can attract additional FDI, some of which is diverted from other host countries. The shift in FDI causes host wages to rise while wages elsewhere fall. The host country with the lower natural attractiveness for FDI (absent intervention) adopts a smaller tax on multinational production. Coordination between hosts eliminates the FDI diversion effect and leads them to impose a harmonized FDI tax that is larger than their non‐cooperative tax levels.