School of Business and Economics

Events

28 November 2017

Workshop: Tax Competition between National Governments for Footloose Multinationals: Perspectives from Economics

Presented By Firms in the Global Economy Research Interest Group

About this event

Programme

2.00-2:50 pm: Paper 1

  • Presentation of “Transport Infrastructure Investments and Competition for FDI” by Dr Kate Hynes (University College Dublin)
  • Discussion by Professor Randall Wigle (Wilfrid Laurier University, currently visiting Loughborough University)
  • Q&A

2:50-3:40 pm: Paper 2 

  • Presentation of “Fiscal Competition for Plant and Profits: Adjusting Expectations about Gains from Tackling Profit Shifting” by Mr Daniel Gravino (University of Malta and Loughborough PhD student in Economics)
  • Discussion by Professor David Collie (Cardiff University)
  • Q&A

3:40-4:10: Refreshments

4:10 to 5.00pm: Paper 3

  • Presentation of “Does Tax Competition Make Mobile Firms More Footloose?” by Professor Ian Wooton (University of Strathclyde and Visiting Professor of Microeconomics at Loughborough University)
  • Discussion by Professor Arijit Mukherjee (University of Nottingham)
  • Q&A

Abstracts

Paper 1: “Transport Infrastructure Investments and Competition for FDI” 

Presenter: Dr Kate Hynes (University College Dublin)

Co-authors: Jie Ma (University of International Business and Economics) and Cheng Yuan (Peking University)

This paper studies how transport infrastructure investments affect a bidding war for a firm between two asymmetric countries within a region in a context of imperfect competition, where transport infrastructure investments play the role of a global public good, leading to a reduction in the unit trade cost between the two countries. A number of interesting results are derived from the model. In particular, transport infrastructure investments can intensify fiscal competition between the two countries. Surprisingly, this conventional wisdom seems to be confirmed by this paper for the first time. Welfare implications of the model are also examined.

Paper 2: “Fiscal Competition for Plant and Profits: Adjusting Expectations about Gains from Tackling Profit Shifting” 

Presenter: Mr Daniel Gravino (University of Malta and Loughborough PhD student in Economics)

Co-author: Dr Ben Ferrett (Loughborough University)

We study the effects of costly profit shifting in a model with two countries that engage in fiscal competition at two levels: first they compete for an MNE’s plant via lump-sum subsidies, and after the MNE’s plant location decision, they compete for its imperfectly mobile profits via proportional tax rates. We show that any gains in tax revenues resulting from more costly profit shifting will be partly offset by higher subsidies in the bidding stage for the MNE’s plant. Consequently, the positive impact of anti-tax avoidance policies on host countries’ tax revenues may be smaller than anticipated because they also intensify the competition for real capital. We show that the difference in the size of competing countries is key in determining whether higher costs of profit shifting intensify competition for real capital. We also show that more costly profit shifting benefits both governments but harms the MNE. The latter outweighs the former, giving rise to a dead-weight loss that causes world welfare to decline.

Paper 3: “Does Tax Competition Make Mobile Firms More Footloose?” 

Presenter: Professor Ian Wooton (University of Strathclyde and Visiting Professor of Microeconomics in SBE)

Co-authors: Dr Ben Ferrett (Loughborough University) and Dr Andreas Hoefele (Competition and Markets Authority)

Existing analyses of fiscal competition for foreign direct investment (FDI) often assume a one-shot interaction between governments and the firm within a static geographical environment where the firm makes a permanent location choice. We examine a two-period regional model where the economic geography evolves, giving the firm an incentive to relocate between periods. Government competition for FDI leads the firm to make efficient location choices, with relocation “more likely” than in the absence of international tax competition because the winning bid absorbs some of the firm’s relocation costs. When more time periods are examined, tax competition induces firm relocation sooner than in its absence.