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Tax competition between developed, emerging, and developing countries – Same same but different?

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  • Mardan, Mohammed
  • Stimmelmayr, Michael

Abstract

This paper analyzes tax competition between countries, which differ in their country-specific risks. We show that the outcome of asymmetric tax competition crucially depends on the ability of multinational firms to shift profits. With high costs of profit shifting, higher-risk countries set lower tax rates than lower-risk countries whereas the opposite is true if the costs of profit shifting are low. The results provide an explanation for the patterns observed in the corporate income tax policies across countries differing in their level of development. Moreover, for intermediate costs of profit shifting, we show that countries' absolute risk level plays an important role in tax rate setting. These results carry important implication for the empirical tax competition literature.

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  • Mardan, Mohammed & Stimmelmayr, Michael, 2020. "Tax competition between developed, emerging, and developing countries – Same same but different?," Journal of Development Economics, Elsevier, vol. 146(C).
  • Handle: RePEc:eee:deveco:v:146:y:2020:i:c:s0304387820300663
    DOI: 10.1016/j.jdeveco.2020.102491
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    Keywords

    Tax competition; Country risk; Developing countries; Asymmetric countries;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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