IDEAS home Printed from https://ideas.repec.org/h/nbr/nberch/7740.html
   My bibliography  Save this book chapter

Why Is There Corporate Taxation in a Small Open Economy? The Role of Transfer Pricing and Income Shifting

In: The Effects of Taxation on Multinational Corporations

Author

Listed:
  • Roger H. Gordon
  • Jeffrey K. MacKie-Mason

Abstract

Several recent papers argue that corporate income taxes should not be used by small, open economies. With capital mobility, the burden of the tax falls on fixed factors (e.g., labor), and the tax system is more efficient if labor is taxed directly. However, corporate taxes not only exist but rates are roughly comparable with the top personal tax rates. Past models also forecast that multinationals should not invest in countries with low corporate tax rates, since the surtax they owe when profits are repatriated puts them at a competitive disadvantage. Yet such foreign direct investment is substantial. We suggest that the resolution of these puzzles may be found in the role of income shifting, both domestic (between the personal and corporate tax bases) and cross-border (through transfer pricing). Countries need nondistortionary corporate taxes as a backstop to labor taxes to discourage individuals from converting their labor income into otherwise untaxed corporate income. The optimal corporate and labor tax rates are equal. We also explore some other effects that domestic and cross-border income shifting have on optimal tax design.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Roger H. Gordon & Jeffrey K. MacKie-Mason, 1995. "Why Is There Corporate Taxation in a Small Open Economy? The Role of Transfer Pricing and Income Shifting," NBER Chapters,in: The Effects of Taxation on Multinational Corporations, pages 67-94 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:7740
    as

    Download full text from publisher

    File URL: http://www.nber.org/chapters/c7740.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gordon, Roger H & Bovenberg, A Lans, 1996. "Why Is Capital So Immobile Internationally? Possible Explanations and Implications for Capital Income Taxation," American Economic Review, American Economic Association, pages 1057-1075.
    2. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters,in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
    3. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, pages 905-940.
    4. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home To America: Dividend Repatriations By U.S. Multinationals," NBER Chapters,in: Taxation in the Global Economy, pages 161-208 National Bureau of Economic Research, Inc.
    5. Gordon, R.H. & Mackie-Mason, J.K., 1993. "Tax Distorsions to the Choice of Organizational Form," Memorandum 21/1993, Oslo University, Department of Economics.
    6. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
    7. Roger H. Gordon & Joel Slemrod, 1988. "Do We Collect Any Revenue from Taxing Capital Income?," NBER Chapters,in: Tax Policy and the Economy: Volume 2, pages 89-130 National Bureau of Economic Research, Inc.
    8. Gordon, Roger H. & MacKie-Mason, Jeffrey K., 1994. "Tax distortions to the choice of organizational form," Journal of Public Economics, Elsevier, pages 279-306.
    9. Mackie-Mason, Jeffrey K & Gordon, Roger H, 1997. " How Much Do Taxes Discourage Incorporation?," Journal of Finance, American Finance Association, vol. 52(2), pages 477-505, June.
    10. Gordon, Roger H, 1992. " Can Capital Income Taxes Survive in Open Economies?," Journal of Finance, American Finance Association, vol. 47(3), pages 1159-1180, July.
    11. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    12. Harry Grubert & Joel Slemrod, 1998. "The Effect Of Taxes On Investment And Income Shifting To Puerto Rico," The Review of Economics and Statistics, MIT Press, pages 365-373.
    13. Gordon, Roger H. & MacKie-Mason, Jeffrey K., 1994. "Tax distortions to the choice of organizational form," Journal of Public Economics, Elsevier, pages 279-306.
    14. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, pages 561-574.
    15. Gravelle, Jane G & Kotlikoff, Laurence J, 1989. "The Incidence and Efficiency Costs of Corporate Taxation When Corporate and Noncorporate Firms Produce the Same Good," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 749-780, August.
    16. repec:bla:joares:v:30:y:1992:i::p:103-124 is not listed on IDEAS
    17. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, pages 1086-1102.
    18. Goldin,Ian & Winters,L. Alan (ed.), 1992. "Open Economies," Cambridge Books, Cambridge University Press, number 9780521420563, December.
    19. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
    20. Harry Grubert & Joel Slemrod, 1998. "The Effect Of Taxes On Investment And Income Shifting To Puerto Rico," The Review of Economics and Statistics, MIT Press, pages 365-373.
    21. Koichi Hamada, 1966. "Strategic Aspects of Taxation on Foreign Investment Income," The Quarterly Journal of Economics, Oxford University Press, vol. 80(3), pages 361-375.
    22. Gordon, Roger & Kalambokidis, Laura & Slemrod, Joel, 2004. "Do we now collect any revenue from taxing capital income?," Journal of Public Economics, Elsevier, pages 981-1009.
    23. Polinsky, Mitchell & Shavell, Steven, 1979. "The Optimal Tradeoff between the Probability and Magnitude of Fines," American Economic Review, American Economic Association, pages 880-891.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:7740. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: () or (Joanne Lustig). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.