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Wages and International Tax Competition

  • Sebastian Krautheim


    (University of Frankfurt)

  • Tim Schmidt-Eisenlohr


    (Centre for Business Taxation and Nuffield College, University of Oxford and CESifo, Munich)

Firms generating larger surpluses on average pay higher wages. We study the effect of this rent-sharing between firms and workers on international tax competition. In our model, firms in a large country can shift surplus to a tax haven. In the benchmark case firms only have a tax incentive for profit shifting as shifted surplus is fully taken into account in the wage bargaining. In this case rent-sharing decreases the competitive pressure on the large country and leads to higher equilibrium tax rates. When workers do not observe the full surplus shifted, a wage incentive arises. Profit shifting then becomes more attractive as it reduces the surplus bargained over with workers. If this effect is sufficiently strong, rent-sharing increases the competitive pressure on the large country, which implies a lower equilibrium tax rate.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1123.

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Date of creation: 2011
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Handle: RePEc:btx:wpaper:1123
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