We develop a stylized model of international tax competition between a large country and a tax haven. In the large country, firms in a monopolistically competitive industry generate positive profits which can be taxed by the government. Firms have heterogeneous productivity levels and can choose to undertake `profit shifting' FDI in order to benefit from lower tax rates abroad. We find that economies with a low degree of firm heterogeneity and a high degree of monopolistic market power are less affected by international tax competition. They face lower out flows of the tax base and can set higher tax rates.
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Paper provided by European University Institute in its series Economics Working Papers with number
ECO2009/15.
Length: Date of creation: 2009 Date of revision: Handle: RePEc:eui:euiwps:eco2009/15
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Find related papers by JEL classification: F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
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