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Wages and International Tax Competition

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  • Sebastian Krautheim
  • Tim Schmidt-Eisenlohr

Abstract

Firms generating larger surpluses on average pay higher wages. We study the effect of this rent-sharing between firms and workers on international tax competition. In our model, firms in a large country can shift surplus to a tax haven. In the benchmark case firms only have a tax incentive for profit shifting as shifted surplus is fully taken into account in the wage bargaining. In this case rent-sharing decreases the competitive pressure on the large country and leads to higher equilibrium tax rates. When workers do not observe the full surplus shifted, a wage incentive arises. Profit shifting then becomes more attractive as it reduces the surplus bargained over with workers. If this effect is sufficiently strong, rent-sharing increases the competitive pressure on the large country, which implies a lower equilibrium tax rate.
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  • Sebastian Krautheim & Tim Schmidt-Eisenlohr, 2016. "Wages and International Tax Competition," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 893-923, November.
  • Handle: RePEc:bla:reviec:v:24:y:2016:i:5:p:893-923
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    3. Clemens Fuest & Andreas Peichl & Sebastian Siegloch, 2018. "Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany," American Economic Review, American Economic Association, vol. 108(2), pages 393-418, February.
    4. Schochet, Sholom & Benlemlih, Mohammed & Jaballah, Jamil, 2022. "Is corporate tax avoidance related to employee treatment?," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 63-80.
    5. repec:zbw:rwirep:0531 is not listed on IDEAS
    6. Andrea Schneider, 2017. "Corporate Taxation of Heterogeneous Firms and the Welfare Effects of Labour Unions," The World Economy, Wiley Blackwell, vol. 40(4), pages 703-714, April.
    7. R. Alison Felix & James R. Hines, 2022. "Corporate taxes and union wages in the United States," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(6), pages 1450-1494, December.
    8. Nils aus dem Moore, 2014. "Shifting the Burden of Corporate Taxes: Heterogeneity in Direct Wage Incidence," Ruhr Economic Papers 0531, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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    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
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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