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Targeted Transfers, Investment Spillovers, and the Tax Environment

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  • Lynne Pepall
  • Daniel Richards

Abstract

We examine the informational role of targeted tax transfers used by local governments to attract corporate investment projects. The transfer may potentially be used to solve an information externality in which subsequent investments that follow the initial project may fail to occur even though they are profitable. The targeted transfer may be used to signal the profitability of such ancillary investments and thereby attract them. We show that this signaling role implies that an environment of either generally high corporate tax rates or low gains from secondary investments paradoxically yields an equilibrium in which the necessary government subsidy is lower.

Suggested Citation

  • Lynne Pepall & Daniel Richards, 2007. "Targeted Transfers, Investment Spillovers, and the Tax Environment," Discussion Papers Series, Department of Economics, Tufts University 0702, Department of Economics, Tufts University.
    • Handle: RePEc:tuf:tuftec:0702
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    File URL: http://ase.tufts.edu/econ/research/documents/2007/pepallRichardsInvestment.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    taxes; transfers; externalities;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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