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Taxing and Subsidizing Foreign Investors

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Many countries impose taxes on foreign investors while also having in place targeted subsidies that are designed to attract them. This paper shows that such a policy can be optimal for a host country. The government has an incentive to tax inframarginal firms because they are relatively immobile and an incentive to subsidize marginal firms because the economic activity generated by such a subsidy can increase domestic wages in excess of the fiscal cost. These policies improve domestic welfare at the expense of foreigners. Hence, this analysis can explain why tax coordination efforts can simultaneously entail reduced taxes and subsidies.
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Keywords: FIRM HETEROGENEITY; FOREIGN DIRECT INVESTMENT; INTERNATIONAL TAXATION

Document Type: Research Article

Publication date: 01 December 2017

This article was made available online on 29 September 2017 as a Fast Track article with title: "Taxing and Subsidizing Foreign Investors".

More about this publication?
  • As one of the world's oldest professional journals in public finance, founded in 1884, FinanzArchiv (FA) publishes original work from all fields of public economics which are of interest to an international readership, e.g. taxation, public debt, public goods, public choice, federalism, market failure, social policy, and the welfare state. Special emphasis is on high-quality theoretical and empirical papers on current policy issues.

    FA is a peer-reviewed journal commited to a prompt turnaround of submissions.

    FA is listed in the Social Science Citation Index (SSCI), in Current Contents/Social and Behavioral Sciences, in Econ Lit, in the Journal of Economic Literature, in IDEAS and RePEc and in the International Bibliography of the Social Sciences.

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