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Do countries compensate firms for international wage differentials?

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  • Mittermaier, Ferdinand
  • Rincke, Johannes

Abstract

We address the role of labor cost differentials for national tax policies. Modeling a tax competition race between two countries competing for a population of mobile firms, we show that in equilibrium, the high-wage country charges a lower tax than the low-wage country. Moreover, under tax competition the high-wage country attracts more firms than in a setting without taxation. Exploiting exogenous variation in labor cost differentials induced by the breakdown of communism in eastern Europe, we find that tax policies are in line with the model prediction. Our most conservative estimates suggest that a one dollar increase in the compensation cost differential (in prices as of 2000) triggers a cut of the statutory corporate income tax rate by about one percentage point.

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  • Mittermaier, Ferdinand & Rincke, Johannes, 2013. "Do countries compensate firms for international wage differentials?," Journal of Public Economics, Elsevier, vol. 102(C), pages 23-36.
    • Handle: RePEc:eee:pubeco:v:102:y:2013:i:c:p:23-36
    DOI: 10.1016/j.jpubeco.2013.03.003
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    Cited by:

    1. 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).
    2. Hikaru Ogawa & Yasuhiro Sato & Toshiki Tamai, 2016. "Who gains from capital market integration? Tax competition between unionized and non-unionized countries," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 76-110, February.
    3. Nelly Exbrayat & Benny Geys, 2016. "Economic Integration, Corporate Tax Incidence and Fiscal Compensation," The World Economy, Wiley Blackwell, vol. 39(11), pages 1792-1811, November.
    4. Nelly Exbrayat & Carl Gaigné & Stéphane Riou, 2012. "The effects of labour unions on international capital tax competition," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(4), pages 1480-1503, November.

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    More about this item

    Keywords

    Foreign direct investment; Corporate taxation; Labor costs;
    All these keywords.

    JEL classification:

    • 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
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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