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Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity

Listed author(s):
  • Langenmayr Dominika

    ()

    (Department of Economics, University of Munich, Akademiestr. 1/II, D-80779 Munich, Germany)

This paper analyzes measures that limit firms’ profit shifting activities in a model that incorporates heterogeneous firm productivity and monopolistic competition. Such measures, e.g. thin capitalization rules, have become increasingly widespread as governments have reacted to growing profit shifting activities of multinational companies. However, besides limiting profit shifting, such rules entail costs. As the regulations can only focus on the means to shift profits, not on profit shifting itself, they impose costs on all firms, no matter whether these firms shift profits abroad or not. In the model, these costs force some firms to exit the market. Thus, as the resulting lower competition makes the remaining firms more profitable, regulations to limit profit shifting may even increase the aggregate amount of profits shifted abroad. From a welfare point of view, it can be optimal not to limit profit shifting by such rules.

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 15 (2015)
Issue (Month): 4 (October)
Pages: 1657-1677

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Handle: RePEc:bpj:bejeap:v:15:y:2015:i:4:p:1657-1677:n:5
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  1. Huizinga, Harry & Laeven, Luc, 2008. "International profit shifting within multinationals: A multi-country perspective," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1164-1182, June.
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  8. Thiess Buettner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions," Working Papers 2006-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
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