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Taxing Multinationals

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  • Michael P. Devereux
  • R. Glenn Hubbard

Abstract

This paper analyzes the effects of tax policy on the strategic choices of a domestic multinational company competing with a foreign multinational company in a third country. We demonstrate the role of the effective average tax rate and the effective marginal tax rate on the company's choices. We consider the impact on national welfare of alternative tax policies for outbound investment. Our results differ from existing models. In contrast to Feldstein and Hartman (1979), in our model, taxing foreign source income on accrual with a deduction for foreign taxes is not generally optimal. However, unlike Mintz and Tulkens (1996), the optimal policy for domestic and outbound investment is linked through the strategic choices of the multinational.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7920.

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Date of creation: Sep 2000
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Publication status: published as Devereux, Michael P. and R. Glenn Hubbard. "Taxing Multinationals," International Tax and Public Finance, 2003, v10(4,Aug), 469-487.
Handle: RePEc:nbr:nberwo:7920

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  1. Bruce, N., 1992. "Why Are There Foreign Tax Credits," Discussion Papers in Economics at the University of Washington 92-08, Department of Economics at the University of Washington.
  2. James Levinsohn & Joel Slemrod, 1990. "Taxes, Tariffs, and The Global Corporation," NBER Working Papers 3500, National Bureau of Economic Research, Inc.
  3. Joel Slemrod, 1995. "Free trade taxation and protectionist taxation," International Tax and Public Finance, Springer, vol. 2(3), pages 471-489, October.
  4. Michael Devereux & Rachel Griffith, 1996. "Taxes and the location of production: evidence from a panel of US multinationals," IFS Working Papers W96/14, Institute for Fiscal Studies.
  5. Devereux, Michael P. & Pearson, Mark, 1995. "European tax harmonisation and production efficiency," European Economic Review, Elsevier, vol. 39(9), pages 1657-1681, December.
  6. Jason Cummins & R. Glenn Hubbard, 1995. "The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm-Level Panel Data," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 123-152 National Bureau of Economic Research, Inc.
  7. Eckhard Janeba, 1993. "Foreign Direct Investment under Oligopoly: Profit Shifting of Profit Capturing?," Discussion Paper Serie A 420, University of Bonn, Germany.
  8. Michael P. Devereux & Rachel Griffith, 1998. "The Taxation of Discrete Investment Choices," Keele Department of Economics Discussion Papers (1995-2001) 98/08, Department of Economics, Keele University.
  9. James A. Brander, 1995. "Strategic Trade Policy," NBER Working Papers 5020, National Bureau of Economic Research, Inc.
  10. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
  11. Feldstein, Martin & Hines, James R. & Hubbard, R. Glenn (ed.), 1995. "The Effects of Taxation on Multinational Corporations," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226240954, January.
  12. King, Mervyn A. & Fullerton, Don, 2010. "The Taxation of Income from Capital," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226436319, January.
  13. Julie Collins & Douglas Shackelford, 1995. "Corporate domicile and average effective tax rates: The cases of Canada, Japan, the United Kingdom, and the United States," International Tax and Public Finance, Springer, vol. 2(1), pages 55-83, February.
  14. Mihir C. Desai & C. Fritz Foley & James R. Hines Jr., 2005. "Foreign Direct Investment and the Domestic Capital Stock," NBER Working Papers 11075, National Bureau of Economic Research, Inc.
  15. Martin Feldstein, 1994. "The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock," NBER Working Papers 4668, National Bureau of Economic Research, Inc.
  16. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  17. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  18. Horst, Thomas, 1980. "A Note on the Optimal Taxation of International Investment Income," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 793-98, June.
  19. Roger H. Gordon, 1990. "Can Capital Income Taxes Survive in Open Economies?," NBER Working Papers 3416, National Bureau of Economic Research, Inc.
  20. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  21. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  22. Motta, Massimo, 1992. "Multinational firms and the tariff-jumping argument : A game theoretic analysis with some unconventional conclusions," European Economic Review, Elsevier, vol. 36(8), pages 1557-1571, December.
  23. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "The Effects of Taxation on Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-2, July.
  24. Hines, James R. Jr., 1999. "The Case against Deferral: A Deferential Reconsideration," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 385-404, September.
  25. Feldstein, Martin & Hartman, David, 1979. "The Optimal Taxation of Foreign," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 613-29, November.
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