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Imperfect tax competition for profits, asymmetric equilibrium and beneficial tax havens

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  • Johannesen, Niels

Abstract

We present a model of tax competition for real investment and profits and show that the presence of tax havens in some cases increases the tax revenue of countries. In the first part of the paper, we argue that tax competition for profits is likely to be imperfect in the sense that the jurisdiction with the lowest tax rate does not necessarily attract all shifted profits. Under this assumption, tax competition between a large number of identical countries may lead to either a symmetric equilibrium with no profit shifting or an asymmetric equilibrium where firms shift profits from high-tax to low-tax countries. In the second part of the paper, we introduce tax havens. Starting from a symmetric equilibrium, tax havens unambiguously reduce the tax revenue of countries due to a 'leakage effect' -- tax havens attract tax base from countries -- and a 'competition effect' -- the optimal response to the increased tax sensitivity of tax bases involves a reduction of tax rates. Starting from an asymmetric equilibrium, however, tax havens also raise the tax revenue of countries through a 'crowding effect' -- tax havens make it less attractive to compete for profits and thus induce low-tax countries to become high-tax countries. We demonstrate that the latter effect may dominate the former effects so that countries, on balance, benefit from the presence of tax havens.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 81 (2010)
Issue (Month): 2 (July)
Pages: 253-264

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Handle: RePEc:eee:inecon:v:81:y:2010:i:2:p:253-264

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: Tax competition Profit shifting Tax havens;

References

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  1. Peralta, Susana & Wauthy, Xavier & van Ypersele, Tanguy, 2006. "Should countries control international profit shifting?," Journal of International Economics, Elsevier, vol. 68(1), pages 24-37, January.
  2. Qing Hong & Michael Smart, 2006. "In praise of tax havens: International tax planning and foreign direct investment," Working Papers tecipa-265, University of Toronto, Department of Economics.
  3. Dhammika Dharmapala & James R. Hines Jr., 2006. "Which Countries Become Tax Havens?," NBER Working Papers 12802, National Bureau of Economic Research, Inc.
  4. Harry Huizinga & Luc Laeven & Gaëtan Nicodème, 2007. "Capital Structure and International Debt Shifting," Working Papers CEB 07-015.RS, ULB -- Universite Libre de Bruxelles.
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  7. Stöwhase, Sven, 2004. "Asymmetric Capital Tax Competition with Profit Shifting," Discussion Papers in Economics 454, University of Munich, Department of Economics.
  8. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
  9. Slemrod, Joel, 2004. "Are corporate tax rates, or countries, converging?," Journal of Public Economics, Elsevier, vol. 88(6), pages 1169-1186, June.
  10. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 757-62, December.
  11. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  12. Richard Baldwin; Paul Krugman, 2001. "Agglomeration, Integration and Tax Harmonization," IHEID Working Papers 01-2001, Economics Section, The Graduate Institute of International Studies.
  13. Fuest, Clemens & Hemmelgarn, Thomas, 2005. "Corporate tax policy, foreign firm ownership and thin capitalization," Regional Science and Urban Economics, Elsevier, vol. 35(5), pages 508-526, September.
  14. Wilson, John Douglas, 1987. "Trade in a Tiebout Economy," American Economic Review, American Economic Association, vol. 77(3), pages 431-41, June.
  15. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  16. Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2207-2223, September.
  17. Slemrod, Joel & Wilson, John D., 2009. "Tax competition with parasitic tax havens," Journal of Public Economics, Elsevier, vol. 93(11-12), pages 1261-1270, December.
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Citations

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Cited by:
  1. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
  2. Shafik Hebous & Vilen Lipatov, 2011. "A Journey from a Corruption Port to a Tax Haven," CESifo Working Paper Series 3620, CESifo Group Munich.
  3. Johannesen, Niels, 2012. "Optimal fiscal barriers to international economic integration in the presence of tax havens," Journal of Public Economics, Elsevier, vol. 96(3), pages 400-416.
  4. Elsayyad, May & Konrad, Kai A., 2012. "Fighting Multiple Tax Havens," Munich Reprints in Economics 13964, University of Munich, Department of Economics.
  5. 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.
  6. Sven Stöwhase, 2013. "How Profit Shifting May Increase the Tax Burden of Multinationals: A Simple Model with Discrete Investment Choices," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(2), pages 185-207, 04.
  7. Shafik Hebous, 2011. "Money at the Docks of Tax Havens: A Guide," CESifo Working Paper Series 3587, CESifo Group Munich.
  8. 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.
  9. May Elsayyad, 2012. "Bargaining over Tax Information Exchange," Working Papers bargaining_over_tax_infor, Max Planck Institute for Tax Law and Public Finance.

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