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Unilateral tax reform: Border adjusted taxes, cash flow taxes, and transfer pricing

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  • Bond, Eric W.
  • Gresik, Thomas A.

Abstract

We study the economic effects of unilateral adoption of corporate tax policies that include the choice between destination-based and source-based taxation and between cash flow and income taxes. We utilize a heterogeneous firm model in which monopolistically competitive North firms choose whether to outsource an intermediate good to an unrelated South firm or to produce in a subsidiary in the South. Standard pass through arguments no longer apply because of the income shifting behavior of multinationals and endogenous choice of organizational form. The high tax North country will prefer a destination-based tax over a source-based tax if it adopts a cash flow tax, but whether the cash flow tax is preferred to an income tax will depend on the volume of trade in the differentiated products sector. If the high tax country adopts a destination-based cash flow tax, the low tax country will prefer a destination-based income tax to capture rents from the foreign subsidiaries.

Suggested Citation

  • Bond, Eric W. & Gresik, Thomas A., 2020. "Unilateral tax reform: Border adjusted taxes, cash flow taxes, and transfer pricing," Journal of Public Economics, Elsevier, vol. 184(C).
  • Handle: RePEc:eee:pubeco:v:184:y:2020:i:c:s0047272720300244
    DOI: 10.1016/j.jpubeco.2020.104160
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    Cited by:

    1. Shafik Hebous & Alexander Klemm, 2018. "A Destination-Based Allowance for Corporate Equity," CESifo Working Paper Series 7363, CESifo.
    2. Kato, Hayato & Okoshi, Hiofumi, 2019. "Economic Integration and Agglomeration of Multinational Production with Transfer Pricing," Discussion Papers in Economics 62013, University of Munich, Department of Economics.
    3. Quint, Ansgar F. & Rudsinske, Jonas F., 2020. "International trade and tax-motivated transfer pricing," Center for European, Governance and Economic Development Research Discussion Papers 406, University of Goettingen, Department of Economics.
    4. Shafik Hebous & Alexander Klemm, 2020. "A destination-based allowance for corporate equity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 753-777, June.
    5. Thomas A. Gresik & Eric Bond, 2021. "Can Destination-Based Cash Flow Taxes Arise in Equilibrium?," CESifo Working Paper Series 8836, CESifo.

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    More about this item

    Keywords

    Border adjustments; Destination-based taxes; Source-based taxes; Cash flow taxes; Income taxes; Transfer pricing; Unilateral tax reform;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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