MEASURING TAX AND INCENTIVE COMPETITION - WHAT IS THE BEST YARDSTICK

Although much research has been conducted on state and local governmen t economic development policy in the US, there is no agreement on how tax and other incentives should be measured. There are serious problem s with the widely used summary measures of tax burdens and incentive p rogramme activity. The hypothetical firm approach provides the best ya rdstick for measuring incentives. We review this approach, identify it s major assumptions and present empirical estimates of the sensitivity of results to these assumptions. We show how discretionary incentives can be incorporated into hypothetical firm models.