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Strathprints makes available scholarly Open Access content by the Fraser of Allander Institute (FAI), a leading independent economic research unit focused on the Scottish economy and based within the Department of Economics. The FAI focuses on research exploring economics and its role within sustainable growth policy, fiscal analysis, energy and climate change, labour market trends, inclusive growth and wellbeing.

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Regional tax coordination and foreign direct investment

Haufler, A. and Wooton, I. (2006) Regional tax coordination and foreign direct investment. European Economic Review, 50 (2). pp. 285-305. ISSN 0014-2921

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Abstract

This paper analyses the effects of a regionally coordinated profit tax or location subsidy 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 coordination can lead to two types of welfare gain. First, for investments that would take place in the union in the absence of coordination, a coordinated tax increase can transfer location rents from the firm to the union. Second, by internalising all of the union's benefits from foreign direct investment, a coordinated tax reduction can attract more welfare-enhancing investment than when member states act in isolation. Depending on which motive dominates, tax levels may thus rise or fall under regional coordination.