The Costs and Benefits of Supporting Data Centers: A General Equilibrium Analysis

Large data centers enjoy government support in many countries. These centers are not labor-intensive, but energy-intensive, thus tending to push up electricity prices and possibly crowding out labor-intensive firms. In addition, when owned by multinational companies, profits are difficult to tax in the country of residence. We look at the benefits and costs of supporting data centers in a general equilibrium setting. We assume that an energy tax is reduced as a way of supporting such centers. We show that the net benefits of this policy depends crucially, in general equilibrium, on the value of a tax elasticity. This result can be interpreted as a ”sufficient statistics” regarding the welfare impact of such a tax-reform (in the country where the tax exemption is made). We also show, by an example, that the approach can also given useful information (in the sense of ”sufficient statistics” literature) even when the change is non-marginal.