The impact of tax and infrastructure competition on the profitability of local firms.

International capital mobility intensifies tax competition between jurisdictions. However, many firms only operate domestically and are internationally immobile. This paper aims to analyze the effect of tax competition on the profitability of local (immobile) firms, especially when tax and non-tax instruments, including infrastructure provision, are involved. We show that tax competition decreases investment and profit of local firms when internationally mobile firms do not benefit sufficiently from local infrastructure. Tax harmonization does not eliminate this result and is not always favorable to local firms. Under tax discrimination, increased mobility of capital is beneficial to local firms. However, this discrimination is detrimental to local firms. [ABSTRACT FROM AUTHOR]