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Consumption and cash-flow taxes in an international setting

Author

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  • Alan J. Auerbach

    (University of California, Berkeley)

  • Michael P. Devereux

    (Oxford University Centre for Business Taxation)

Abstract

We model the effects of consumption-type taxes which differ according to the base and location of the tax. Our model incorporates a multinational producing and selling in two countries with three sources of rent, each in a different location: a fixed basic production factor (located with initial production), mobile managerial skill, and a fixed final production factor (located with consumption). In the general case, we show that for national governments, there are tradeoffs in choosing between alternative taxes. In particular, a cash-flow tax on a source basis creates welfare-impairing distortions to production and consumption, but is partially incident on the owners of domestic production who may be non-resident. By contrast, a destination-based cash-flow tax does not distort behavior, but is incident only on domestic residents. In the alternative case with the returns to the fixed factors accruing to domestic residents, the only distortion from the source-based tax is through the allocation of the mobile managerial skill. In this case, the source-based tax is also incident only on domestic residents, and is dominated by an equivalent tax on a destination basis.

Suggested Citation

  • Alan J. Auerbach & Michael P. Devereux, 2013. "Consumption and cash-flow taxes in an international setting," Working Papers 1311, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:1311
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    References listed on IDEAS

    as
    1. Keen, Michael & Lahiri, Sajal, 1998. "The comparison between destination and origin principles under imperfect competition," Journal of International Economics, Elsevier, vol. 45(2), pages 323-350, August.
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    3. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, vol. 54(6), pages 1357-1373, November.
    4. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
    5. Lockwood, Ben, 2001. "Tax competition and tax co-ordination under destination and origin principles: a synthesis," Journal of Public Economics, Elsevier, vol. 81(2), pages 279-319, August.
    6. Devereux, Michael & Bond, Stephen Roy, 2002. "Cash Flow Taxes in an Open Economy," CEPR Discussion Papers 3401, C.E.P.R. Discussion Papers.
    7. Auerbach, Alan J, 1997. "The Future of Fundamental Tax Reform," American Economic Review, American Economic Association, vol. 87(2), pages 143-146, May.
    8. repec:pri:cepsud:93bradford is not listed on IDEAS
    9. Harry Grubert & T. Scott Newlon, 1997. "Taxing Consumption in a Global Economy," Books, American Enterprise Institute, number 52737, September.
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    Cited by:

    1. Bofinger, Peter & Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Wieland, Volker, 2018. "Vor wichtigen wirtschaftspolitischen Weichenstellungen. Jahresgutachten 2018/19 [Setting the Right Course for Economic Policy. Annual Report 2018/19]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201819.
    2. Devereux, Michael P. & Fuest, Clemens & Lockwood, Ben, 2015. "The taxation of foreign profits: A unified view," Journal of Public Economics, Elsevier, vol. 125(C), pages 83-97.
    3. Kimberly Clausing & Edward Kleinbard & Ms. Thornton Matheson, 2016. "U.S. Corporate Income Tax Reform and its Spillovers," IMF Working Papers 2016/127, International Monetary Fund.
    4. Omar Barbiero & Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2019. "The Macroeconomics of Border Taxes," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 395-457.

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    More about this item

    Keywords

    Cash-flow taxes;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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