The role of mobility in tax and subsidy competition

In this paper, we analyse the role of mobility in tax and subsidy competition. Our primary result is that increasing �relocation� mobility of firms leads to increasing �net� tax revenues under fairly weak conditions. While enhanced relocation mobility intensifies tax competition, it weakens subsidy competition. The resulting fall in the governments� subsidy payments overcompensates the decline in tax revenues, leading to a rise in net tax revenues. We derive this conclusion in a model in which two governments are first engaged in subsidy competition and thereafter in tax competition, and firms locate and potentially relocate in response to the two political choices