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Wages and International Tax Competition

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  • Sebastian Krautheim
  • Tim Schmidt-Eisenlohr

Abstract

Rent-sharing between firm owners and workers is a robust empirical finding. If workers bargain with firms, information on the actual surplus is essential. When the firm can use profit shifting to create private information on the surplus, it can thereby reduce its wage bill. We study how rent sharing and this wage incentive for profit shifting affect the ability of governments to tax multinational companies in a standard model of international tax competition. We find that if firms only have a tax incentive for profit shifting, rent-sharing decreases the competitive pressure on the large country and leads to higher equilibrium tax rates. When we allow for the wage channel, this result can change. If the wage incentive is sufficiently strong, rent-sharing increases the competitive pressure on the large country, implying a lower equilibrium tax rate.

Suggested Citation

  • Sebastian Krautheim & Tim Schmidt-Eisenlohr, 2012. "Wages and International Tax Competition," CESifo Working Paper Series 3867, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3867
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    Cited by:

    1. Dwenger, Nadja & Rattenhuber, Pia & Steiner, Viktor, 2011. "Sharing the burden: Empirical evidence on corporate tax incidence," Discussion Papers 2011/19, Free University Berlin, School of Business & Economics.
    2. Clemens Fuest & Andreas Peichl & Sebastian Siegloch, 2018. "Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany," American Economic Review, American Economic Association, vol. 108(2), pages 393-418, February.
    3. repec:bla:worlde:v:40:y:2017:i:4:p:703-714 is not listed on IDEAS
    4. aus dem Moore, Nils, 2014. "Shifting the Burden of Corporate Taxes: Heterogeneity in Direct Wage Incidence," Ruhr Economic Papers 531, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

    More about this item

    Keywords

    wages; tax competition; rent-sharing; profit shifting; tax havens; private information;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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