IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v63y2013icp225-242.html
   My bibliography  Save this article

Corporate taxes and intra-firm trade

Author

Listed:
  • Egger, Peter
  • Seidel, Tobias

Abstract

We argue in this paper that differences in corporate taxes between economies stimulate vertical integration of final goods producers and suppliers of intermediate goods causing more intra-firm trade. This is due to the fact that vertically integrated firms can shift profits from a high-tax jurisdiction, rendering this organizational type more attractive for more productive firms as compared to outsourcing at arm's length. Using data on intra-firm imports of US multinational firms, we provide empirical support for our theoretical findings. Apart from reduced-form regressions we structurally estimate and calibrate the multi-country model for the US and 27 host countries. We find that the observed increase in the tax gap between the US and the average host country of 3.1 percentage points has led to an increase of intra-firm trade flows by 5.5%. Our calibration suggests that this change was stimulated largely by a 9.8% increase in the number of vertically integrated multinational firms.

Suggested Citation

  • Egger, Peter & Seidel, Tobias, 2013. "Corporate taxes and intra-firm trade," European Economic Review, Elsevier, vol. 63(C), pages 225-242.
  • Handle: RePEc:eee:eecrev:v:63:y:2013:i:c:p:225-242
    DOI: 10.1016/j.euroecorev.2013.07.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292113000937
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    2. Ethier, Wilfred J. & Markusen, James R., 1996. "Multinational firms, technology diffusion and trade," Journal of International Economics, Elsevier, vol. 41(1-2), pages 1-28, August.
    3. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2010. "Intrafirm Trade and Product Contractibility," American Economic Review, American Economic Association, vol. 100(2), pages 444-448, May.
    4. Stephen Ross Yeaple, 2006. "Offshoring, Foreign Direct Investment, and the Structure of U.S. Trade," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 602-611, 04-05.
    5. Bernard, Andrew B. & Redding, Stephen, 2010. "Intra-firm trade and product contractibility (Long Version)," LSE Research Online Documents on Economics 48899, London School of Economics and Political Science, LSE Library.
    6. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 306-325, April.
    7. Gene M. Grossman & Elhanan Helpman, 2003. "Outsourcing Versus FDI in Industry Equilibrium," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 317-327, 04/05.
    8. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 569-600.
    9. Gregory Corcos & Delphine M. Irac & Giordano Mion & Thierry Verdier, 2013. "The Determinants of Intrafirm Trade: Evidence from French Firms," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 825-838, July.
    10. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078.
    11. Heckman, James J & Lochner, Lance & Taber, Christopher, 1998. "General-Equilibrium Treatment Effects: A Study of Tuition Policy," American Economic Review, American Economic Association, vol. 88(2), pages 381-386, May.
    12. Werner Antweiler & Daniel Trefler, 2002. "Increasing Returns and All That: A View from Trade," American Economic Review, American Economic Association, vol. 92(1), pages 93-119, March.
    13. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2006. "Transfer Pricing by U.S.-Based Multinational Firms," NBER Working Papers 12493, National Bureau of Economic Research, Inc.
    14. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
    15. Karolina Ekholm & Rikard Forslid & James R. Markusen, 2007. "Export-Platform Foreign Direct Investment," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 776-795, June.
    16. Laura Alfaro & Andrew Charlton, 2009. "Intra-industry Foreign Direct Investment," American Economic Review, American Economic Association, vol. 99(5), pages 2096-2119, December.
    17. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 135-159.
    18. Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2207-2223, September.
    19. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1375-1418.
    20. Natalia Ramondo & Veronica Rappoport & Kim J. Ruhl, 2011. "Horizontal Vs. Vertical FDI : Revisiting Evidence from U.S. Multinationals," Working Papers 11-12, New York University, Leonard N. Stern School of Business, Department of Economics.
    21. Costas Arkolakis & Marc-Andreas Muendler, 2010. "The Extensive Margin of Exporting Products: A Firm-level Analysis," CESifo Working Paper Series 3309, CESifo Group Munich.
    22. Pol Antràs, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September.
    23. Maria Bas & Juan Carluccio, 2009. "Wage Bargaining and the Boundaries of the Multinational Firm," CEP Discussion Papers dp0963, Centre for Economic Performance, LSE.
    24. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
    25. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
    26. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    27. Hines, James R. Jr., 1999. "Lessons From Behavioral Responses to International Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 305-322, June.
    28. Grubert, Harry, 2003. "Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(1), pages 221-242, March.
    29. Keuschnigg, Christian & Devereux, Michael P., 2013. "The arm's length principle and distortions to multinational firm organization," Journal of International Economics, Elsevier, vol. 89(2), pages 432-440.
    30. Swenson, Deborah L., 2001. "Tax Reforms and Evidence of Transfer Pricing," National Tax Journal, National Tax Association, vol. 54(n. 1), pages 7-26, March.
    31. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, May.
    32. Juan Carluccio & Thibault Fally, 2012. "Global Sourcing under Imperfect Capital Markets," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 740-763, August.
    33. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
    34. Wilfred J. Ethier, 1986. "The Multinational Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 805-833.
    35. repec:hrv:faseco:4784029 is not listed on IDEAS
    36. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
    37. Barbara Spencer, 2005. "International outsourcing and incomplete contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1107-1135, November.
    38. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bauer, Christian J. & Langenmayr, Dominika, 2013. "Sorting into outsourcing: Are profits taxed at a gorilla's arm's length?," Journal of International Economics, Elsevier, vol. 90(2), pages 326-336.
    2. Peter Egger & Marko Koethenbuerger, 2016. "Hosting multinationals: Economic and fiscal implications," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 67(01), pages 45-69, February.
    3. Dekker, Vincent & Strohmaier, Kristina, 2017. "The effect of transfer pricing regulations on intra-industry trade," Hohenheim Discussion Papers in Business, Economics and Social Sciences 32-2017, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    4. Badi H. Baltagi & Peter H. Egger & Michaela Kesina, 2018. "Contagious Exporting and Foreign Ownership: Evidence from Firms in Shanghai Using a Bayesian Spatial Bivariate Probit Model," CESifo Working Paper Series 6993, CESifo Group Munich.
    5. Hayato Kato & Hirofumi Okoshi, 2017. "Production Location of Multinational Firms under Transfer Pricing: The Impact of the Arm's Length Principle," Keio-IES Discussion Paper Series 2017-016, Institute for Economics Studies, Keio University.

    More about this item

    Keywords

    Multinational firms; International outsourcing; Vertical integration; Intra-firm trade; Transfer pricing;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:63:y:2013:i:c:p:225-242. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/eer .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.