PRICE UNCERTAINTY, FACTOR SUBSTITUTION, AND THE LOCATIONAL BIAS OF BUSINESS TAXES

• Published in: Journal of regional science 1985-05, Vol.25 (2), p.175-190
• Main Authors: Martinich, Joseph S., Hurter Jr, Arthur P.
• Format: Article
• Language: English
• ISSN: 0022-4146; 1467-9787
• DOI: 10.1111/j.1467-9787.1985.tb00067.x

ABSTRACT Consideration of the integrated production‐location problem is extended to include several types of business taxes. Many of these taxes are technologically and spatially neutral under certainty, but are shown to be nonneutral when factor prices are stochastic and the firm is risk averse, even when the tax is spatially uniform. Consequently, even a nationally uniform tax can have regional biases and can encourage migration of plants. When factor prices are uncertain, the effects of taxes on output rates, input ratios, and plant location vary with the form of the tax imposed as well as the amount to be paid. Income taxes involve the taxing authority in sharing the risk with the firm and are shown to promote risk taking by the firm and induce the expansion of output. Locational incentives which are mutually beneficial to firms and the government are presented.