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Why Capital Income Taxes Survive in Open Economies: The Role of Multinational Firms

  • Clemens Fuest

    ()

  • Bernd Huber

    ()

This paper discusses the role of multinational firms and double taxation treaties for corporate income taxation in open economies. We show that it is optimal for a small open economy to levy positive corporate income taxes if multinational firms are taxed according to the full taxation after deduction system or the foreign tax credit system. Positive corporate taxes also occur in the asymmetric case where some countries apply the exemption system and others apply the tax credit system. If all countries apply the exemption system, the optimal corporate income tax is zero. We also show that, under tax competition, corporate income taxes are not necessarily too low from the perspective of the economy as a whole. While the undertaxation result is confirmed for the case of the exemption system, tax rates may also be inefficiently high if the deduction or the credit systems are applied. Copyright Kluwer Academic Publishers 2002

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File URL: http://hdl.handle.net/10.1023/A:1020969604309
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 9 (2002)
Issue (Month): 5 (September)
Pages: 567-589

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Handle: RePEc:kap:itaxpf:v:9:y:2002:i:5:p:567-589
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  9. Bond, E.W. & Samuelson, L., 1988. "Strategic Behavior And The Rules For International Taxation Of Capital," Papers 3-88-10, Pennsylvania State - Department of Economics.
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  11. Janeba, Eckhard, 1992. "Corporate income tax competition, double taxation treaties, and foreign direct investment," Discussion Papers, Series II 194, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
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