Wednesday, December 7th, 2016 8:54 am

Local Tax Incentives

Question A: Giving tax incentives to specific firms to locate operations in a country typically generates domestic benefits that outweigh the costs to the country providing the incentives.

Responses
 

Source: European IGM Economic Experts Panel
www.igmchicago.org/european-economic-experts-panel

Responses weighted by each expert's confidence

Source: European IGM Economic Experts Panel
www.igmchicago.org/european-economic-experts-panel

Question B: Europe as a whole benefits when European cities or countries compete with each other by giving tax incentives to firms to locate operations in their jurisdictions.

Responses
 

Source: European IGM Economic Experts Panel
www.igmchicago.org/european-economic-experts-panel

Responses weighted by each expert's confidence

Source: European IGM Economic Experts Panel
www.igmchicago.org/european-economic-experts-panel

Question A Participant Responses

Participant University Vote Confidence Comment Bio/Vote History
Aghion Philippe Aghion Harvard Did Not Answer
Bio/Vote History
         
Allen Franklin Allen Imperial College London Uncertain 5
Difficult to answer such a general question - more information about the particular circumstances is required.
Bio/Vote History
         
Antras Pol Antras Harvard Uncertain 7
There is evidence of positive effects of attracting firms (esp. via backward linkages), but hard to compare estimated gains to tax breaks
-see background information here
Bio/Vote History
         
Baldwin Richard Baldwin The Graduate Institute Geneva Disagree 5
Bio/Vote History
         
Besley Timothy J. Besley LSE Uncertain 8
It rides on whether the tax incentives are targeted towards industries with high spillovers.
Bio/Vote History
         
Blanchard Olivier Blanchard Peterson Institute Uncertain 9
it depends on the demand elasticity. There are cases where it is greater than one, but cases where it is less. ``typically'' is too strong
Bio/Vote History
         
Bloom Nicholas Bloom Stanford Disagree 6
Providing incentives to firms is highly risky in terms of corruption and distortions of government incentives.
Bio/Vote History
         
Blundell Richard William Blundell University College London Disagree 8
Apart from encouraging some initial start-ups in a field, firm specific subsidies very likely distort production and reduce overall income.
Bio/Vote History
         
Bénassy-Quéré Agnès Bénassy-Quéré Paris School of Economics Disagree 8
Even in distressed areas this kind of policy gets poor results.
Bio/Vote History
         
Carletti Elena Carletti Bocconi Agree 7
this seems to be proved by countries like Ireland or Luxembourg where fiscal advantages to firms seem to be beneficial
Bio/Vote History
         
Danthine Jean-Pierre Danthine Paris School of Economics Agree 6
It is a matter of self-interest for the region itself but there may be circumstances where the region's interests are not well represented.
Bio/Vote History
         
De Grauwe Paul De Grauwe LSE Agree 7
Bio/Vote History
         
Eeckhout Jan Eeckhout University College London Disagree 7
Bio/Vote History
         
Fehr Ernst Fehr Universität Zurich Uncertain 5
Bio/Vote History
         
Freixas Xavier Freixas Universitat Pompeu Fabra Strongly Disagree 5
This is a beggar-thy-neighbour policy, so it would be correct only provided the other countries do not reciprocate
Bio/Vote History
         
Fuchs-Schündeln Nicola Fuchs-Schündeln Goethe-Universität Frankfurt Uncertain 6
Bio/Vote History
         
Galí Jordi Galí Universitat Pompeu Fabra Agree 8
At least in expectation the benefits should be positive if the deal is offered by a central authority.
Bio/Vote History
         
Garicano Luis Garicano LSE Did Not Answer
Bio/Vote History
         
Giavazzi Francesco Giavazzi Bocconi Did Not Answer
Bio/Vote History
         
Griffith Rachel Griffith University of Manchester Disagree 9
In many cases incentives go to firms that would choose that location in the absence of the incentives, so the costs outweigh the benefits.
Bio/Vote History
         
Guerrieri Veronica Guerrieri Chicago Booth Agree 7
Bio/Vote History
         
Guiso Luigi Guiso Einaudi Institute for Economics and Finance Uncertain 4
very much depends on the specific of the tax incentives; they may well be grabbed by rent seeking firms
Bio/Vote History
         
Hellwig Martin Hellwig Max Planck Institute for Research on Collective Goods Did Not Answer
Bio/Vote History
         
Honohan Patrick Honohan Trinity College Dublin Disagree 5
Competition between locations means that firm collects the rent.
Bio/Vote History
         
Kleven Henrik Kleven LSE Uncertain 9
Cannot be answered without information on exact tax parameters & conclusive estimates of firm location elasticities (which aren't available)
Bio/Vote History
         
Krahnen Jan Pieter Krahnen Goethe University Frankfurt Agree 7
While benefits are consummated locally, negative externalities and allocative distortions are largely outside the country.
Bio/Vote History
         
Krusell Per Krusell Stockholm University Strongly Disagree 7
this is good policy only if the government is able to select the right companies - which it is typically not
Bio/Vote History
         
Kőszegi Botond Kőszegi Central European University Agree 5
Bio/Vote History
         
La Ferrara Eliana La Ferrara Bocconi Uncertain 2
Bio/Vote History
         
Leuz Christian Leuz Chicago Booth Uncertain 3
Can be local benefits but unclear politicians offer tax incentives only when net beneficial locally. Governmental agency problems get in way
-see background information here
Bio/Vote History
         
Meghir Costas Meghir Yale Uncertain 1
Bio/Vote History
         
Neary Peter Neary Oxford Disagree 8
Providing information and helping foreign firms cope with bureaucracy are desirable; direct grants are unlikely to match their full costs
Bio/Vote History
         
O'Rourke Kevin O'Rourke Oxford Uncertain 8
It depends on the nature of the incentives and the nature of firms. Targeting sectors presumably better than targeting "specific firms".
Bio/Vote History
         
Pagano Marco Pagano Università di Napoli Federico II Uncertain 3
Providing such incentives may simply induce other jurisdictions to angage in the same behavior, and so eventually benefit only firms.
Bio/Vote History
         
Pastor Lubos Pastor Chicago Booth Agree 5
Bio/Vote History
         
Persson Torsten Persson Stockholm University Disagree 5
The question seems to suppose unilateral action, but a lack of foreign resoponse at is unrealistic.
Bio/Vote History
         
Pissarides Christopher Pissarides LSE Uncertain 7
Whether it does or not depends on many other factors, such as infrastructure suitable for the firm's operations
Bio/Vote History
         
Portes Richard Portes London Business School Agree 5
Ireland is a positive example. But many emerging markets countries are counter examples.
Bio/Vote History
         
Prendergast Canice Prendergast Chicago Booth Agree 8
Bio/Vote History
         
Reichlin Lucrezia Reichlin London Business School Agree 5
Bio/Vote History
         
Repullo Rafael Repullo CEMFI Agree 4
Bio/Vote History
         
Rey Hélène Rey London Business School Agree 7
Luxembourg and Ireland are good examples...
Bio/Vote History
         
Schoar Antoinette Schoar MIT Uncertain 7
Bio/Vote History
         
Van Reenen John Van Reenen MIT Disagree 7
Most of benefits are typically appropriated by firms themselves. Best way to get FDI is to improve skills, rule of law, local public goods
Bio/Vote History
         
Vickers John Vickers Oxford Uncertain 5
Risks of over-estimating value of inducing location and of 'overpaying' for it.
Bio/Vote History
         
Voth Hans-Joachim Voth University of Zurich Uncertain 5
distortionary effects on factor markets are rarely accounted for
Bio/Vote History
         
Weder di Mauro Beatrice Weder di Mauro Gutenberg University Mainz and INSEAD Disagree 6
Bio/Vote History
         
Whelan Karl Whelan University College Dublin Uncertain 5
This can be true but governments aren't always great at "picking winners." Some special local tax rates are probably just bad ideas.
Bio/Vote History
         
Wyplosz Charles Wyplosz The Graduate Institute Geneva Agree 9
Ireland says it all.
Bio/Vote History
         
Zilibotti Fabrizio Zilibotti Universität Zurich Agree 3
Bio/Vote History
         

Question B Participant Responses

Participant University Vote Confidence Comment Bio/Vote History
Aghion Philippe Aghion Harvard Did Not Answer
Bio/Vote History
         
Allen Franklin Allen Imperial College London Disagree 7
Small countries have an incentive to offer low rates since their fixed costs are smaller.
Bio/Vote History
         
Antras Pol Antras Harvard Uncertain 9
Sometimes tax competition can lead to inefficiently low tax rates (a race to the bottom in taxes or a winner's curse in subsidies)
Bio/Vote History
         
Baldwin Richard Baldwin The Graduate Institute Geneva Uncertain 1
Bio/Vote History
         
Besley Timothy J. Besley LSE Disagree 8
I am not totally opposed to tax competition but there need to be "rules of the game" to prevent a race to the bottom.
Bio/Vote History
         
Blanchard Olivier Blanchard Peterson Institute Disagree 10
well known case of tax competition driving rates to zero. Zero rates are not optimal.
Bio/Vote History
         
Bloom Nicholas Bloom Stanford Uncertain 5
This helps reduce capital taxes, but risks generating incentives for burearacy and even corruption in governments
Bio/Vote History
         
Blundell Richard William Blundell University College London Strongly Disagree 7
Competition through local firm tax incentives may unnecessarily reduce the country's tax base and increase other less efficient taxes.
Bio/Vote History
         
Bénassy-Quéré Agnès Bénassy-Quéré Paris School of Economics Disagree 9
Tax competition cannot be welfare enhancing as long as it is distorted (e.g. due to profit shifting).
Bio/Vote History
         
Carletti Elena Carletti Bocconi Uncertain 7
this may lead to too lax competition
Bio/Vote History
         
Danthine Jean-Pierre Danthine Paris School of Economics Agree 5
Under transparent rules tax competition is positive, but this condition is often not met.
Bio/Vote History
         
De Grauwe Paul De Grauwe LSE Disagree 8
Bio/Vote History
         
Eeckhout Jan Eeckhout University College London Disagree 8
Bio/Vote History
         
Fehr Ernst Fehr Universität Zurich Disagree 7
Bio/Vote History
         
Freixas Xavier Freixas Universitat Pompeu Fabra Strongly Disagree 3
Competition should be based on infrastructure, services and human capital, not beggar thy neighbour policies
Bio/Vote History
         
Fuchs-Schündeln Nicola Fuchs-Schündeln Goethe-Universität Frankfurt Disagree 6
Bio/Vote History
         
Galí Jordi Galí Universitat Pompeu Fabra Uncertain 7
Possibly not if competition is restricted to tax incentives, but more generally it may encourage more business-friendly policies for all.
Bio/Vote History
         
Garicano Luis Garicano LSE Did Not Answer
Bio/Vote History
         
Giavazzi Francesco Giavazzi Bocconi Did Not Answer
Bio/Vote History
         
Griffith Rachel Griffith University of Manchester Strongly Disagree 9
European countries largely compete against each other for firm location, so gains in one country equal losses in another.
Bio/Vote History
         
Guerrieri Veronica Guerrieri Chicago Booth Uncertain 7
Bio/Vote History
         
Guiso Luigi Guiso Einaudi Institute for Economics and Finance Agree 4
Competition may i setting taxes may lower overall taxations , helping reduce the size of the government
Bio/Vote History
         
Hellwig Martin Hellwig Max Planck Institute for Research on Collective Goods Did Not Answer
Bio/Vote History
         
Honohan Patrick Honohan Trinity College Dublin Strongly Disagree 8
Competitions between cities means that firms collect the rent.
Bio/Vote History
         
Kleven Henrik Kleven LSE Strongly Disagree 9
Bio/Vote History
         
Krahnen Jan Pieter Krahnen Goethe University Frankfurt Disagree 7
Compare innovation and competition (pro) with rent seeking and allocative distortions (contra). For Europe, the "contra" argument dominates.
Bio/Vote History
         
Krusell Per Krusell Stockholm University Disagree 7
if we think corporate taxes are too low this may be a good thing, but it is then better to just lower them across the board
Bio/Vote History
         
Kőszegi Botond Kőszegi Central European University Strongly Disagree 8
Bio/Vote History
         
La Ferrara Eliana La Ferrara Bocconi Disagree 8
Bio/Vote History
         
Leuz Christian Leuz Chicago Booth Disagree 2
Zero sum unless companies would otherwise leave EU. Inefficient but it can help when tax rates are too high due to political economy reasons
Bio/Vote History
         
Meghir Costas Meghir Yale Uncertain 1
Bio/Vote History
         
Neary Peter Neary Oxford Disagree 8
Competition on services and in providing information is desirable; competition on subsidies and tax breaks risks a race to the bottom
Bio/Vote History
         
O'Rourke Kevin O'Rourke Oxford Uncertain 8
Depends on nature of incentives & on whether there is competition between EU & rest of world. There may be negative distributional effects
Bio/Vote History
         
Pagano Marco Pagano Università di Napoli Federico II Strongly Disagree 3
Such competition may eventually only benefits the firms, not EU citizens as a whole.
Bio/Vote History
         
Pastor Lubos Pastor Chicago Booth Uncertain 3
Bio/Vote History
         
Persson Torsten Persson Stockholm University Strongly Disagree 8
Tax compeittion may easily leave all countries worse off (no inflows and lower revenue) unless initial taxes are much too high.
Bio/Vote History
         
Pissarides Christopher Pissarides LSE Strongly Disagree 10
The strongest will become stronger and the weakest weaker!
Bio/Vote History
         
Portes Richard Portes London Business School Strongly Disagree 10
If 'Europe' means anything, it should renounce tax competitiveness.
Bio/Vote History
         
Prendergast Canice Prendergast Chicago Booth Disagree 6
Bio/Vote History
         
Reichlin Lucrezia Reichlin London Business School Disagree 5
Bio/Vote History
         
Repullo Rafael Repullo CEMFI Uncertain 4
Bio/Vote History
         
Rey Hélène Rey London Business School Strongly Disagree 8
Among other negative effects, there are lost tax revenues which could finance public goods.
Bio/Vote History
         
Schoar Antoinette Schoar MIT Strongly Disagree 8
Bio/Vote History
         
Van Reenen John Van Reenen MIT Disagree 7
Sets up a race to the bottom in terms of taxation
Bio/Vote History
         
Vickers John Vickers Oxford Disagree 5
Bio/Vote History
         
Voth Hans-Joachim Voth University of Zurich Strongly Disagree 5
this favors large firms and creates size-dependent distortions
Bio/Vote History
         
Weder di Mauro Beatrice Weder di Mauro Gutenberg University Mainz and INSEAD Disagree 6
Bio/Vote History
         
Whelan Karl Whelan University College Dublin Strongly Disagree 8
This kind of process drives down average corporate tax rates across the EU. There are probably better ways to cut taxes.
Bio/Vote History
         
Wyplosz Charles Wyplosz The Graduate Institute Geneva Agree 9
Tax competition is a Nash game that stands to hurt every one. But, gIven high tax rates in Europe, tax competition keeps the lid on.
Bio/Vote History
         
Zilibotti Fabrizio Zilibotti Universität Zurich Disagree 7
Bio/Vote History
         

About the European IGM Economic Experts Panel

This panel explores the views of European economists on vital public policy issues. It does this by polling them on important policy questions, by including a way for them to explain their answers briefly if they wish, and by disseminating these responses directly to the public in a simple format.

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