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Allowing firms to choose between separate accounting and formula apportionment taxation

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  • Gresik, Thomas A.

Abstract

This paper analyzes the effect on firm behavior and national tax revenues of allowing multinational firms to choose to be taxed under separate accounting rules or an apportionment formula. Separate accounting always generates more profitable output and conditional labor demand distortions from tax differentials while either method can generate a more profitable income-shifting distortion. Both low-cost and high-cost firms can prefer separate accounting while medium-cost firms prefer formula apportionment. With symmetric countries, a firm's preferred method generates greater tax revenues in the country with the lower tax rate. With asymmetric countries, a firm's preferred method need no longer generate greater tax revenues in the lower-tax-rate country due to the fact that countries and firms now value tax base distortions differently. With this misalignment of preferences, some firms can choose the preferred method of both countries at fixed tax rates.

Suggested Citation

  • Gresik, Thomas A., 2016. "Allowing firms to choose between separate accounting and formula apportionment taxation," Journal of Public Economics, Elsevier, vol. 138(C), pages 32-42.
  • Handle: RePEc:eee:pubeco:v:138:y:2016:i:c:p:32-42
    DOI: 10.1016/j.jpubeco.2016.04.002
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    References listed on IDEAS

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    Cited by:

    1. Mardan, Mohammed & Stimmelmayr, Michael, 2018. "Tax revenue losses through cross-border loss offset: An insurmountable hurdle for formula apportionment?," European Economic Review, Elsevier, vol. 102(C), pages 188-210.

    More about this item

    Keywords

    Separate accounting; Formula apportionment; Transfer prices; Firm choice;

    JEL classification:

    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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