Internationally Mobile Firms and Tax Policy

This paper attempts to analyse how the government from a social point of view should handle firms that demand preferential tax treatment on grounds of being internationally mobile. A revelation mechanism is constructed taking into account that migration decisions by firms have negative fiscal effects and also affect national industrial clusters. Some important and seemingly counter intuitive results are: (1) Information rent is acquired by immobile (inefficient) firms, (2) The optimal allocation is implementable within the framework of a corporate income tax system, where mobile firms will selfselect more unfavourable depreciation allowances as compared to immobile firms, and (3) In relative terms, the immobile sector will expand at the expense of the mobile sector.