It is difficult to justify tax incentives within the existing economics
literature on tax competition. We develop a model in which communities
are interested in attracting firms not only for their own capital but
also for the concentration externalities, a form of agglomeration
economies, their location bestows on existing firms. We find that it
is efficient in this case for communities to offer tax incentives,
defined as a tax rate below the benefit tax level, to firms. We present
the recent relocation ...
It is difficult to justify tax incentives within the existing economics
literature on tax competition. We develop a model in which communities
are interested in attracting firms not only for their own capital but
also for the concentration externalities, a form of agglomeration
economies, their location bestows on existing firms. We find that it
is efficient in this case for communities to offer tax incentives,
defined as a tax rate below the benefit tax level, to firms. We present
the recent relocation of the Boeing Corporation's headquarters from
Seattle to Chicago as a case study.
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