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Do countries compensate firms for international wage differentials?

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  • Mittermaier, Ferdinand
  • Rincke, Johannes
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    Abstract

    We address the role of labor cost differentials for national tax policies. Modeling a tax competition race between two countries competing for a population of mobile firms, we show that in equilibrium, the high-wage country charges a lower tax than the low-wage country. Moreover, under tax competition the high-wage country attracts more firms than in a setting without taxation. Exploiting exogenous variation in labor cost differentials induced by the breakdown of communism in eastern Europe, we find that tax policies are in line with the model prediction. Our most conservative estimates suggest that a one dollar increase in the compensation cost differential (in prices as of 2000) triggers a cut of the statutory corporate income tax rate by about one percentage point.

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    Bibliographic Info

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

    Volume (Year): 102 (2013)
    Issue (Month): C ()
    Pages: 23-36

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    Handle: RePEc:eee:pubeco:v:102:y:2013:i:c:p:23-36

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    Web page: http://www.elsevier.com/locate/inca/505578

    Related research

    Keywords: Foreign direct investment; Corporate taxation; Labor costs;

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    References

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    8. R. Alison Felix & James R. Hines, Jr., 2009. "Corporate Taxes and Union Wages in the United States," NBER Working Papers 15263, National Bureau of Economic Research, Inc.
    9. Ronald B. Davies & Johannes Voget, 2010. "Tax Competition in an Expanding European Union," GEE Papers 0033, Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação, revised Jan 2011.
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    15. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," Munich Reprints in Economics 20270, University of Munich, Department of Economics.
    16. Michael Overesch & Johannes Rincke, 2009. "What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks," CESifo Working Paper Series 2535, CESifo Group Munich.
    17. Jozef Konings & Alan Patrick Murphy, 2006. "Do Multinational Enterprises Relocate Employment to Low-Wage Regions? Evidence from European Multinationals," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 142(2), pages 267-286, July.
    18. Arulampalam, Wiji & Devereux, Michael P. & Maffini, Giorgia, 2012. "The direct incidence of corporate income tax on wages," European Economic Review, Elsevier, vol. 56(6), pages 1038-1054.
    19. Dwenger, Nadja & Rattenhuber, Pia & Steiner, Viktor, 2013. "Sharing the burden? Empirical evidence on corporate tax incidence," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80040, Verein für Socialpolitik / German Economic Association.
    20. Timothy Besley & Torsten Persson & Daniel M. Sturm, 2010. "Political Competition, Policy and Growth: Theory and Evidence from the US," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1329-1352.
    21. Haufler, Andreas & Wooton, Ian, 2010. "Competition for firms in an oligopolistic industry: The impact of economic integration," Journal of International Economics, Elsevier, vol. 80(2), pages 239-248, March.
    22. David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
    23. Haufler, Andreas & Mittermaier, Ferdinand, 2011. "Unionisation Triggers Tax Incentives to Attract Foreign Direct Investment," Munich Reprints in Economics 20404, University of Munich, Department of Economics.
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