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Taxing multinationals in the presence of internal capital markets

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  • Koethenbuerger, Marko
  • Stimmelmayr, Michael

Abstract

There is ample evidence that internal capital markets incur efficiency costs for multinational enterprises (MNEs). This paper analyzes whether tax avoidance behavior interacts with these costs and how policies of competing governments respond to it. We show that the interaction in itself may lead to profit taxes that are inefficiently high (low), provided the costs are attenuated (magnified) by higher profit taxes. Further, internal efficiency costs might render infrastructure provision inefficiently low. We also clarify the implications of the decision to set up an internal capital market and of external finance for the behavior of competing governments. The results are consistent with empirical findings that are not inherently related to the notion of fiscal competition.

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  • Koethenbuerger, Marko & Stimmelmayr, Michael, 2016. "Taxing multinationals in the presence of internal capital markets," Journal of Public Economics, Elsevier, vol. 138(C), pages 58-71.
  • Handle: RePEc:eee:pubeco:v:138:y:2016:i:c:p:58-71
    DOI: 10.1016/j.jpubeco.2016.04.003
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    Cited by:

    1. 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.
    2. Peter Egger & Michael Stimmelmayr, 2017. "Taxation and the Multinational Firm," CESifo Working Paper Series 6384, CESifo Group Munich.

    More about this item

    Keywords

    Fiscal competition; Multinational firms; Internal efficiency costs; Managerial behavior; Corporate tax avoidance;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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