The purpose of this paper is to shed light on the
controversial subject of tax incentives to promote regional
development. Although extensive research has been conducted, a
review of the literature gives an inconclusive answer to whether
economic incentives are effective. One reason is the fact that for
some researchers “effective" means the significant location of new
firms in targeted areas, while for others the creation of jobs
regardless if new firms are arriving in a significant fashion. We
present this dichotomy by analyzing a tax incentive program via both
alternatives: location and job creation. The contribution of the paper
is to inform policymakers about the potential opportunities and
pitfalls when designing incentive strategies. This is particularly
relevant, given that both the US and Europe have been promoting
incentives as a tool for regional economic development.
[1] R. W. Wassmer, "Can Local Incentives Alter a Metropolitan City-s
Economic Development?", Urban Studies, 31, pp. 1251-78, 1994.
[2] R. Altshuler; H. Grubert, and T.S. Newlon, "Has U.S. Investment
Abroad Become More Sensitive to Tax Rates?" in International
Taxation and Multinational Activity, NBER Report series, Chicago:
University of Chicago Press, 2001, pp. 9-32.
[3] T. J. Bartik, Who Benefits from State and Local Economic
Development Policies?, W.E. UPJOHN Institute for Employment
Research. Kalamazoo, Michigan, 1991.
[4] B.M. Rubin, Barry M., and M.G. Wilder, "Urban Enterprise Zones:
Employment Impacts and Fiscal Incentives," American Planning
Association Journal, Vol. 55, pp. 418-31, 1989.
[5] L.E. Papke, "Tax Policy and Urban Development: Evidence from the
Indiana Enterprise Zone Program," Journal of Public Economics, Vol.
54, pp. 37-49, 1994.
[6] Sweet (1999) M.L. Sweet, Regional Economic Development in the
European Union and North, America Preager Publishers, 1999.
[7] Thomas (2000) K.P. Thomas, Competing for Capital: Europe and North
America in a Global Era, Georgetown University Press 2000.
[8] N. Phelps, Nicholas, and M. Tewdwr-Jones, Mark, "Globalisation,
Regions and the State: Exploring the limitation of Economic
Modernisation through Inward Investment," Urban Studies, Vol. 38, pp.
1253-1272, 2001.
[9] B. Bilbao-Osorio, Be├▒at, and A. Rodriguez-Pose, "From R&D to
Innovation and Economic Growth in the EU," Growth and Change, Vol.
35, pp. 434-455, 2004.
[10] G.L. Clark; T. Palaskas, P. Tracey; M. Tsampra, "Globalization and
Competitive Strategy in Europe's Vulnerable Regions: Firm, Industry
and Country Effects in Labour-Intensive Industries," Regional Studies,
Vol. 38, pp. 1085-1100, 2004.
[11] K.P. Thomas, Competing for Capital: Europe and North America in a
Global Era, Georgetown University Press, 2000.
[12] M. C. Guisan, and E. Aguayo, "Desarrollo Econ├│mico De Europa
Central en 1950-2002: Modelos Econométricos y Comparaci├│n con
Irlanda, Espa├▒a Y Austria," Estudios Econ├│micos de Desarrollo
Internacional, Vol. 4, pp. 49-72, 2005.
[13] U. Broll; S. Marjit; J.E. Wahl, "Regional Policy, Integration and the
Distribution of Foreign Investment," Review of Regional Research, Vol.
25, pp. 107-112, 2005.
[14] H. S. Perloff; E. S. Dunn; E. Lampard, and R. Muth, Regions, Resources
and Economic Growth. University of Nebraska Press, 1960.
[15] H. S. Perloff, How a region grows; area development in the U.S.,
Committee for Economic Development, New York, 1963.
[16] E. Dunn, Recent Economic Development as Revealed by the Changing
Structure of Employment, University of Florida Press, 1962.
[17] V. Fuchs, Changes in the Location of Manufacturing in the United States
since 1929, Yale University Press, 1962.
[18] L. Ashby, "The Geographical Redistribution of Employment: An
Examination of the Elements of Change," Survey of Current Business,
Vol. 44, pp. 13-20, 1964.
[19] C. C. Coughlin, and P. S. Pollard, "Comparing Manufacturing Export
Growth across States: What Accounts for the Differences?" Federal
Reserve Bank of St. Louis Review, Vol. 83, pp.25-40, 2001.
[20] J. Esteban, "Regional Convergence in Europe and the Industry Mix: A
Shift Share Analysis," Regional Science & Urban Economics, Vol. 30,
pp. 353-64, 2000.
[21] R. Q. Hanham, and S. Banasick, "Shift-Share Analysis and Changes in
Japanese Manufacturing Employment," Growth & Change, Vol. 31, pp.
108-23.
[22] D. W. Carlton, "Why Do New Firms Locate Where They Do: An
Econometric Model", in W. Wheaton, ed., Interregional Movements and
Regional Growth, The Urban Institute, Washington, D.C., pp. 13-50,
1979.
[23] D.W. Carlton, "Location and Employment Choices of New Forms: An
Econometric Model with Discrete and Continuous Endogenous
Variables," The Review of Economics and Statistics, Vol. 65, pp. 440-
49, 1983.
[24] D. McFadden, "Conditional Logit Analysis of Qualitative Choice
Behavior," in P. Zarembka ed., Frontiers in Econometrics, Academic
Press, New York, pp. 105-142, 1974.
[25] W. H. Greene, Econometric Analysis, Prentice Hall, 2003.
[26] A. D. Barbour; L. Holst, and S. Janson, Poisson Approximation, Oxford
University Press, 1992.
[27] W. Baumol, and E. Wolff, "Catching Up in the Postwar Period: Puerto
Rico as the Fifth ATiger@?," World Development, Vol. 24, pp. 869-885,
1996.
[28] P. Guimaraes; R. J. Rolfe, and D.P. Woodward, "Regional Incentives
and Location in Puerto Rico," International Regional Science Review,
Vol. 21, pp. 119-38, 1998.
[29] H. Grubert, and J. Slemrod, "The Effect of Taxes on Investment and
Income Shifting to Puerto Rico," The Review of Economics and
Statistics, Vol. 80, No. 3, pp. 365-373, 1998.
[30] Liard-Muriente C. F. Liard-Muriente, "Expanding Employment by
Attracting FDI," in Proc. 34th Annual Conference of the Northeast
Business & Economics Association, New York, 2007, pp.37-53.
[31] R. R. Nelson, "State Labor Legislation Enacted in 2000," Monthly Labor
Review, Vol. 124, pp.12-24, 2001.
[32] A. B. Krueger, "The Effect of the Minimum Wage When It Really Bites:
A Re-examination of the Evidence from Puerto Rico," Research in
Labor Economics, Vol.14, pp. 1-22, 1995.
[33] A. J. Castillo-Freeman, and R. B. Freeman, When the Minimum Wage
Really Bites: The Effect of the U.S. Level Minimum on Puerto Rico, in:
Immigration and the Work Force: Economic Consequences for the
United States and Source Areas, National Bureau of Economic Research
Project Report, University of Chicago Press, Chicago, pp. 177-211,
1992.
[34] C. E Santiago, "Closing the Gap: The Employment and Unemployment
Effects of Minimum Wage Policy in Puerto Rico," Journal of
Development Economics, Vol. 23, pp. 293-311, 1986.
[35] D. Rodrick, Has Globalization gone too Far? Institute for International
Economics, Washington D.C., 1997.
[36] C. F. Liard-Muriente, "Globalization and Inequality: Some Remarks,"
Equal Opportunities International, Vol. 24, pp. 24-37, 2005.
[1] R. W. Wassmer, "Can Local Incentives Alter a Metropolitan City-s
Economic Development?", Urban Studies, 31, pp. 1251-78, 1994.
[2] R. Altshuler; H. Grubert, and T.S. Newlon, "Has U.S. Investment
Abroad Become More Sensitive to Tax Rates?" in International
Taxation and Multinational Activity, NBER Report series, Chicago:
University of Chicago Press, 2001, pp. 9-32.
[3] T. J. Bartik, Who Benefits from State and Local Economic
Development Policies?, W.E. UPJOHN Institute for Employment
Research. Kalamazoo, Michigan, 1991.
[4] B.M. Rubin, Barry M., and M.G. Wilder, "Urban Enterprise Zones:
Employment Impacts and Fiscal Incentives," American Planning
Association Journal, Vol. 55, pp. 418-31, 1989.
[5] L.E. Papke, "Tax Policy and Urban Development: Evidence from the
Indiana Enterprise Zone Program," Journal of Public Economics, Vol.
54, pp. 37-49, 1994.
[6] Sweet (1999) M.L. Sweet, Regional Economic Development in the
European Union and North, America Preager Publishers, 1999.
[7] Thomas (2000) K.P. Thomas, Competing for Capital: Europe and North
America in a Global Era, Georgetown University Press 2000.
[8] N. Phelps, Nicholas, and M. Tewdwr-Jones, Mark, "Globalisation,
Regions and the State: Exploring the limitation of Economic
Modernisation through Inward Investment," Urban Studies, Vol. 38, pp.
1253-1272, 2001.
[9] B. Bilbao-Osorio, Be├▒at, and A. Rodriguez-Pose, "From R&D to
Innovation and Economic Growth in the EU," Growth and Change, Vol.
35, pp. 434-455, 2004.
[10] G.L. Clark; T. Palaskas, P. Tracey; M. Tsampra, "Globalization and
Competitive Strategy in Europe's Vulnerable Regions: Firm, Industry
and Country Effects in Labour-Intensive Industries," Regional Studies,
Vol. 38, pp. 1085-1100, 2004.
[11] K.P. Thomas, Competing for Capital: Europe and North America in a
Global Era, Georgetown University Press, 2000.
[12] M. C. Guisan, and E. Aguayo, "Desarrollo Econ├│mico De Europa
Central en 1950-2002: Modelos Econométricos y Comparaci├│n con
Irlanda, Espa├▒a Y Austria," Estudios Econ├│micos de Desarrollo
Internacional, Vol. 4, pp. 49-72, 2005.
[13] U. Broll; S. Marjit; J.E. Wahl, "Regional Policy, Integration and the
Distribution of Foreign Investment," Review of Regional Research, Vol.
25, pp. 107-112, 2005.
[14] H. S. Perloff; E. S. Dunn; E. Lampard, and R. Muth, Regions, Resources
and Economic Growth. University of Nebraska Press, 1960.
[15] H. S. Perloff, How a region grows; area development in the U.S.,
Committee for Economic Development, New York, 1963.
[16] E. Dunn, Recent Economic Development as Revealed by the Changing
Structure of Employment, University of Florida Press, 1962.
[17] V. Fuchs, Changes in the Location of Manufacturing in the United States
since 1929, Yale University Press, 1962.
[18] L. Ashby, "The Geographical Redistribution of Employment: An
Examination of the Elements of Change," Survey of Current Business,
Vol. 44, pp. 13-20, 1964.
[19] C. C. Coughlin, and P. S. Pollard, "Comparing Manufacturing Export
Growth across States: What Accounts for the Differences?" Federal
Reserve Bank of St. Louis Review, Vol. 83, pp.25-40, 2001.
[20] J. Esteban, "Regional Convergence in Europe and the Industry Mix: A
Shift Share Analysis," Regional Science & Urban Economics, Vol. 30,
pp. 353-64, 2000.
[21] R. Q. Hanham, and S. Banasick, "Shift-Share Analysis and Changes in
Japanese Manufacturing Employment," Growth & Change, Vol. 31, pp.
108-23.
[22] D. W. Carlton, "Why Do New Firms Locate Where They Do: An
Econometric Model", in W. Wheaton, ed., Interregional Movements and
Regional Growth, The Urban Institute, Washington, D.C., pp. 13-50,
1979.
[23] D.W. Carlton, "Location and Employment Choices of New Forms: An
Econometric Model with Discrete and Continuous Endogenous
Variables," The Review of Economics and Statistics, Vol. 65, pp. 440-
49, 1983.
[24] D. McFadden, "Conditional Logit Analysis of Qualitative Choice
Behavior," in P. Zarembka ed., Frontiers in Econometrics, Academic
Press, New York, pp. 105-142, 1974.
[25] W. H. Greene, Econometric Analysis, Prentice Hall, 2003.
[26] A. D. Barbour; L. Holst, and S. Janson, Poisson Approximation, Oxford
University Press, 1992.
[27] W. Baumol, and E. Wolff, "Catching Up in the Postwar Period: Puerto
Rico as the Fifth ATiger@?," World Development, Vol. 24, pp. 869-885,
1996.
[28] P. Guimaraes; R. J. Rolfe, and D.P. Woodward, "Regional Incentives
and Location in Puerto Rico," International Regional Science Review,
Vol. 21, pp. 119-38, 1998.
[29] H. Grubert, and J. Slemrod, "The Effect of Taxes on Investment and
Income Shifting to Puerto Rico," The Review of Economics and
Statistics, Vol. 80, No. 3, pp. 365-373, 1998.
[30] Liard-Muriente C. F. Liard-Muriente, "Expanding Employment by
Attracting FDI," in Proc. 34th Annual Conference of the Northeast
Business & Economics Association, New York, 2007, pp.37-53.
[31] R. R. Nelson, "State Labor Legislation Enacted in 2000," Monthly Labor
Review, Vol. 124, pp.12-24, 2001.
[32] A. B. Krueger, "The Effect of the Minimum Wage When It Really Bites:
A Re-examination of the Evidence from Puerto Rico," Research in
Labor Economics, Vol.14, pp. 1-22, 1995.
[33] A. J. Castillo-Freeman, and R. B. Freeman, When the Minimum Wage
Really Bites: The Effect of the U.S. Level Minimum on Puerto Rico, in:
Immigration and the Work Force: Economic Consequences for the
United States and Source Areas, National Bureau of Economic Research
Project Report, University of Chicago Press, Chicago, pp. 177-211,
1992.
[34] C. E Santiago, "Closing the Gap: The Employment and Unemployment
Effects of Minimum Wage Policy in Puerto Rico," Journal of
Development Economics, Vol. 23, pp. 293-311, 1986.
[35] D. Rodrick, Has Globalization gone too Far? Institute for International
Economics, Washington D.C., 1997.
[36] C. F. Liard-Muriente, "Globalization and Inequality: Some Remarks,"
Equal Opportunities International, Vol. 24, pp. 24-37, 2005.
@article{"International Journal of Business, Human and Social Sciences:53461", author = "Carlos F. Liard-Muriente", title = "EU, US and Tax Incentives: An Application", abstract = "The purpose of this paper is to shed light on the
controversial subject of tax incentives to promote regional
development. Although extensive research has been conducted, a
review of the literature gives an inconclusive answer to whether
economic incentives are effective. One reason is the fact that for
some researchers “effective" means the significant location of new
firms in targeted areas, while for others the creation of jobs
regardless if new firms are arriving in a significant fashion. We
present this dichotomy by analyzing a tax incentive program via both
alternatives: location and job creation. The contribution of the paper
is to inform policymakers about the potential opportunities and
pitfalls when designing incentive strategies. This is particularly
relevant, given that both the US and Europe have been promoting
incentives as a tool for regional economic development.", keywords = "Employment, Foreign Investment, Tax Incentives.", volume = "1", number = "6", pages = "168-5", }
