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Firms' financial choices and thin capitalization rules under corporate tax competition

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  • Haufler, Andreas
  • Runkel, Marco

Abstract

Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium, each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 6 ()
Pages: 1087-1103

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:6:p:1087-1103

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Keywords: Tax competition; Thin capitalization; Capital structure;

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Citations

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Cited by:
  1. Blouin, J. & Huizinga, H.P. & Laeven, L. & Nicodeme, G., 2014. "Thin Capitalization Rules and Multinational Firm Capital Structure," Discussion Paper, Tilburg University, Center for Economic Research 2014-007, Tilburg University, Center for Economic Research.
  2. Matthias Wrede, 2009. "Multinational Capital Structure and Tax Competition," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200934, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Dreßler, Daniel & Scheuering, Uwe, 2012. "Empirical evaluation of interest barrier effects," ZEW Discussion Papers 12-046, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Hermann Buslei & Martin Simmler, 2012. "The Impact of Introducing an Interest Barrier: Evidence from the German Corporation Tax Reform 2008," Discussion Papers of DIW Berlin 1215, DIW Berlin, German Institute for Economic Research.
  5. Alfons Weichenrieder & Helen Windischbauer, 2008. "Thin-Capitalization Rules and Company Responses Experience from German Legislation," CESifo Working Paper Series 2456, CESifo Group Munich.
  6. Thiess Buettner & Michael Overesch & Georg Wamser, 2014. "Anti Profit-Shifting Rules and Foreign Direct Investment," CESifo Working Paper Series 4710, CESifo Group Munich.
  7. Chu, Hsun, 2013. "Tax Enforcement Policy and the Provision of Public Goods with the Presence of Tax Havens," MPRA Paper 53021, University Library of Munich, Germany, revised Nov 2013.
  8. Schindler, Dirk & Schjelderup, Guttorm, 2008. "Multinationals, Minority Ownership and Tax-Efficient Financing Structures," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2008/19, Department of Business and Management Science, Norwegian School of Economics.
  9. Schindler, Dirk & Schjelderup, Guttorm, 2012. "Debt shifting and ownership structure," European Economic Review, Elsevier, Elsevier, vol. 56(4), pages 635-647.
  10. Chu, Hsun & Lai, Ching-Chong & Cheng, Chu-Chuan, 2013. "Tax Havens, Growth, and Welfare," MPRA Paper 52878, University Library of Munich, Germany, revised Sep 2013.

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