Working Paper: CEPR ID: DP3063
Authors: Andreas Haufler; Ian Wooton
Abstract: This Paper analyses the effects of a regionally coordinated profit tax in a model with three active countries, one of which is not part of the union, and a globally mobile firm. We show that regional tax coordination can lead to two types of welfare gains. First, for investments that would take place in the region in the absence of coordination, this measure can transfer location rents from the firm to the union. Second, by internalizing all of the union's benefits from foreign direct investment, a coordinated policy attracts more investment than when member states act in isolation. Consequently, tax levels may rise or fall under regional coordination.
Keywords: international investment; regional coordination; tax competition
JEL Codes: F15; F23; H73; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regional tax coordination (R50) | welfare gains (D69) |
| Regional tax coordination (R50) | increase in equilibrium taxes (H29) |
| increase in equilibrium taxes (H29) | transfer location rents from firms to the union (F16) |
| Tax coordination (H26) | attract more FDI (F23) |
| Tax coordination (H26) | internalizing benefits from FDI (F23) |
| Tax coordination (H26) | overall welfare of the union (I39) |