Several recent papers argue that corporate income taxes should not be used by small, open economies. With capital mobility, the burden of the tax falls on fixed factors (e.g., labor), and the tax system is more efficient if labor is taxed directly. However, corporate taxes not only exist but rates are roughly comparable with the top personal tax rates. Past models also forecast that multinationals should not invest in countries with low corporate tax rates, since the surtax they owe when profits are repatriated puts them at a competitive disadvantage. Yet such foreign direct investment is substantial. We suggest that the resolution of these puzzles may be found in the role of income shifting, both domestic (between the personal and corporate tax bases) and cross-border (through transfer pricing). Countries need cash-flow corporate taxes as a backstop to labor taxes to discourage individuals from converting their labor income into otherwise untaxed corporate income. We explore how these taxes can best be modified to deal as well with cross-border shifting.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
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Length: Date of creation: Mar 1994 Date of revision: Publication status: published as Jason Cummins, Trevor Harris, Kevin Hassett. "Accounting Standards, Information Flow, and Firm Investment Behavior," in Martin Feldstein, James R. Hines Jr., R. Glenn Hubbard, "The Effects of Taxation on Multinational Corporations" University of Chicago Press (1995) Handle: RePEc:nbr:nberwo:4690
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Roger H. Gordon & James R. Hines Jr., 2002.
"International Taxation,"
NBER Working Papers
8854, National Bureau of Economic Research, Inc.
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Other versions:
Gordon, Roger H. & Hines, James Jr, 2002.
"International taxation,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995
Elsevier.
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