DP3063 Regional Tax Coordination and Foreign Direct Investment

Author(s):	Andreas Haufler, Ian Wooton
Publication Date:	November 2001
Keyword(s):	international investment, regional coordination, tax competition
JEL(s):	F15, F23, H73, H87
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=3063

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.