Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity
AbstractThis paper analyzes measures that limit firms’ profit shifting activities in a model that incorporates heterogeneous firm productivity and monopolistic competition. Such measures, e.g. thin capitalization rules, have become increasingly widespread as governments have reacted to growing profit shifting activities of multinational companies. However, besides limiting profit shifting, such rules entail costs. As the regulations can only focus on the means to shift profits, not on profit shifting itself, they impose costs on all firms, no matter whether these firms shift profits abroad or not. In the model, these costs force some firms to exit the market. Thus, as this makes the remaining firms more profitable, regulations to limit profit shifting may even increase the aggregate amount of profits shifted abroad. From a welfare point of view, it may even be optimal no to limit profit shifting at all.
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Bibliographic InfoPaper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 112.
Length: 21 pages
Date of creation: Nov 2011
Date of revision:
profit shifting; heterogeneous firms; tax competition;
Other versions of this item:
- Langenmayr, Dominika, 2011. "Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity," Discussion Papers in Economics 12419, University of Munich, Department of Economics.
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
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