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Heterogeneous firms, "Profit Shifting" FDI and international tax competition

  • Sebastian Krautheim

    ()

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Tim Schmidt-Eisenlohr

    ()

    (European University Institute - EUI)

Larger firms are more likely to use tax haven operations to exploit international tax differences. We study a tax game between a large country and a tax haven modeling heterogenous monopolistic firms, which can shift profits abroad. We shows that a higher degree of firm heterogeneity (a mean-preserving spread of the cost distribution) increases the degree of tax competition, i.e. it decreases the equilibrium tax rate of the large country, leads to higher outflows of its tax base and thus decreases its equilibrium tax revenue. Similar effects hold for a higher substitutability across varieties. We find that models with homogeneous firms understate the strenght of tax competition.

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Date of creation: Oct 2009
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Handle: RePEc:hal:journl:halshs-00442818
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