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Heterogeneous Firms, 'Profit Shifting' FDI and International Tax Competition

  • Sebastian Krautheim
  • Tim Schmidt-Eisenlohr

We develop a stylized model of international tax competition between a large country and a tax haven. In the large country, firms in a monopolistically competitive industry generate positive profits which can be taxed by the government. Firms have heterogeneous productivity levels and can choose to undertake `profit shifting' FDI in order to benefit from lower tax rates abroad. We find that economies with a low degree of firm heterogeneity and a high degree of monopolistic market power are less affected by international tax competition. They face lower out flows of the tax base and can set higher tax rates.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2009/15.

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Date of creation: 2009
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Handle: RePEc:eui:euiwps:eco2009/15
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