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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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