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Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada

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  • Jack Mintz
  • Michael Smart

Abstract

We study corporate income tax competition when firms operating in multiple jurisdictions can shift income using financial planning strategies. Several such strategies, particularly intra-corporate lending, appear to be actively pursued by companies to reduce subnational corporate taxes in Canada. A simple theoretical model shows how interjurisdictional tax planning can give rise to asymmetries in jurisdictions’ tax policies, with one jurisdiction becoming a “tax haven” to attract taxable income through financial transactions, while others set higher statutory rates. Further, increased competition from tax havens may paradoxically lead to tax increases by high-tax jurisdictions. Analysis of data from administrative tax records suggests income shifting has pronounced effects on provincial tax bases in Canada. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for "tax shifting" firms is 4.3, compared to 1.6 for other, comparable firms.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 554.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_554

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  1. Sam Bucovetsky & Michael Smart, 2002. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," CESifo Working Paper Series 767, CESifo Group Munich.
  2. Dale W. Jorgenson & Kevin J. Stiroh, 2000. "Raising the Speed Limit: U.S. Economic Growth in the Information Age," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 125-236.
  3. Jack M. Mintz, 2000. "Taxation of Investment and Finance in an International Setting: Implications for Tax Competition," CoFE Discussion Paper 00-33, Center of Finance and Econometrics, University of Konstanz.
  4. Rosanne Altshuler & Harry Grubert, 2001. "Repatriation Taxes, Repatriation Strategies and Multinational Financial Policy," NBER Working Papers 8144, National Bureau of Economic Research, Inc.
  5. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  6. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
  7. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
  8. David Harris & Randall Morck & Joel Slemrod & Bernard Yeung, 1991. "Income Shifting in U.S. Multinational Corporations," NBER Working Papers 3924, National Bureau of Economic Research, Inc.
  9. Harry Grubert & Joel Slemrod, 1998. "The Effect Of Taxes On Investment And Income Shifting To Puerto Rico," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 365-373, August.
  10. James R. Hines Jr., 1992. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc.
  11. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  12. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate tax systems and cross country profit shifting," Munich Reprints in Economics 20419, University of Munich, Department of Economics.
  13. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, vol. 54(6), pages 1357-73, November.
  14. Thiess Buettner, 1999. "Determinants of Tax Rates in Local Capital Income Taxation: A Theoretical Model and Evidence from Germany," CESifo Working Paper Series 194, CESifo Group Munich.
  15. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January.
  16. Vijay Jog & Jianmin Tang, 2001. "Tax Reforms, Debt Shifting and Tax Revenues: Multinational Corporations in Canada," International Tax and Public Finance, Springer, vol. 8(1), pages 5-25, January.
  17. Roger H. Gordon & Jeffrey K. MacKie-Mason & R. Glenn Hubbard, 1995. "The Importance of Income Shifting to the Design and Analysis of Tax Policy," NBER Chapters, in: Taxing Multinational Corporations, pages 29-38 National Bureau of Economic Research, Inc.
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  1. How much new revenue will be generated by an increase in federal corporate taxes?
    by Stephen Gordon in Worthwhile Canadian Initiative on 2012-03-10 21:43:59
  2. How much new revenue will be generated by an increase in federal corporate taxes?
    by Stephen Gordon in Worthwhile Canadian Initiative on 2012-03-10 21:43:59
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