Corporate Taxation in Open Economies

This paper analyzes the macroeconomic impact of corporate taxation. The analysis is conducted in a quantitative two-country model. First, the paper describes the long-run effects of corporate taxation. A reduction in the corporate-income tax rate increases GDP, wages, consumption, investment, and business density. The trade balance is at the same time negatively affected. Firms headquartered in a country which lowers its corporate tax become internationally less active and instead focus more on their domestic market. Next, the paper examines transitional dynamics that are induced by a corporate-tax reform. The short-run response of the economy can substantially differ from the long-run response. Finally, the paper investigates the effects of international profit shifting in high-tax and low-tax jurisdictions.