This article was originally published by The Economic Misfit
Do you recall when Amazon’s HQ2 announcement triggered a heated bidding war across U.S. cities and states? In 2019, Virginia’s Senate approved a tax incentive package of up to US$750 million, beating competitors such as Maryland and New Jersey to secure the tech giant’s investment.
What about Intel in Costa Rica? The semiconductor manufacturer decided to open a plant there in the mid-1990s after a competitive site-selection process involving several Asian and Latin American countries. Several factors, including Costa Rica’s tax breaks through a free-trade-zone regime, persuaded Intel to choose the Central American country as the location for its new production site.
Are you familiar with Apple’s landmark dispute with the European Union regarding the tax breaks it received to operate in Ireland? These are just a handful of examples of a phenomenon that recurs worldwide. Anecdotes of government competition over firms are widespread: virtually every continent (and country) has its own example. In such cases, governments unilaterally offer sizable tax incentives to persuade firms to locate or relocate production within their jurisdiction. Economists have coined several terms to describe this phenomenon, including subsidy competition, tax competition, and the race to the bottom. In my job market paper, I study what is arguably one of the most heated cases of tax competition in the world: Brazil’s Fiscal War.
For decades, media outlets, government officials, and intergovernmental organizations have highlighted the severity of tax competition among Brazilian states. Since its implementation in 1965, Brazil’s distinctive VAT system has allowed states to offer sizable tax incentives to attract firms. To estimate the extent of this competition, I compile a novel dataset encompassing tax entitlements forgone at the state-sector level in 2023. Using these data, I estimate that roughly 25 percent of all state tax entitlements were waived through tax incentives in that year, corresponding to a nationwide sticker price of US$44.66 billion. Table 1 illustrates the extent to which (on paper) states waive VAT entitlements through tax incentives. Over time, concerns have mounted that this intense competition has generated significant distortions in the Brazilian economy. …
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