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Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit Taxes

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  • Haufler, Andreas
  • Stähler, Frank

Abstract

We set up a simple two-country model of tax competition where firms with different productivity decide in which location to produce and sell output. In this model, a unique, asymmetric Nash equilibrium is shown to exist, provided that countries are sufficiently different with respect to their exogenous market size. Sorting of firms occurs in equilibrium, as the smaller country levies the lower tax rate and attracts the low-cost firms. A simultaneous expansion of both markets that raises the profitability of firms intensifies tax competition and causes both countries to reduce their tax rates, despite higher corporate tax bases.

Suggested Citation

  • Haufler, Andreas & Stähler, Frank, 2013. "Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit Taxes," Munich Reprints in Economics 20412, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenar:20412
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Johannes Becker & Clemens Fuest, 2011. "Optimal tax policy when firms are internationally mobile," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(5), pages 580-604, October.
    2. Schwab, Thomas & Todtenhaupt, Maximilian, 2016. "Spillover from the haven: Cross-border externalities of patent box regimes within multinational firms," ZEW Discussion Papers 16-073, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Richard E. Baldwin & Toshihiro Okubo, 2014. "Tax Competition with Heterogeneous Firms," Spatial Economic Analysis, Taylor & Francis Journals, vol. 9(3), pages 309-326, September.
    4. Yoshitomo Ogawa & Yoshiyasu Ono, 2016. "The Welfare Effects of Attracting Foreign Direct Investment in the Presence of Unemployment," ISER Discussion Paper 0959, Institute of Social and Economic Research, Osaka University.
    5. Schwab, Thomas & Todtenhaupt, Maximilian, 2017. "Spillover from the Haven: Cross-border Externalities of Patent Box Regimes within Multinational Firms," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168148, Verein für Socialpolitik / German Economic Association.
    6. Krautheim, Sebastian & Schmidt-Eisenlohr, Tim, 2011. "Heterogeneous firms, 'profit shifting' FDI and international tax competition," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 122-133, February.
    7. Langenmayr, Dominika & Haufler, Andreas & Bauer, Christian J., 2015. "Should tax policy favor high- or low-productivity firms?," European Economic Review, Elsevier, vol. 73(C), pages 18-34.
    8. Sebastian Krautheim & Tim Schmidt-Eisenlohr, 2016. "Wages and International Tax Competition," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 893-923, November.
    9. Mohammed Mardan & Michael Stimmelmayr, 2018. "Tax Competition in Developed, Emerging and Developing Regions - Same Same but Different?," CESifo Working Paper Series 7090, CESifo Group Munich.
    10. Maier, Ulf, 2017. "Regulatory Competition In Capital Standards with Selection Effects among Banks," Rationality and Competition Discussion Paper Series 7, CRC TRR 190 Rationality and Competition.
    11. Becker, Johannes & Fuest, Clemens & Riedel, Nadine, 2012. "Corporate tax effects on the quality and quantity of FDI," European Economic Review, Elsevier, vol. 56(8), pages 1495-1511.
    12. MORITA Tadashi & SAWADA Yukiko & YAMAMOTO Kazuhiro, 2016. "Subsidy Competition, Imperfect Labor Market, and Endogenous Entry of Firms," Discussion papers 16096, Research Institute of Economy, Trade and Industry (RIETI).
    13. Itoh, Ryo, 2014. "Tax discrimination against inter-firm networks," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 25-35.
    14. Becker, Johannes & Runkel, Marco, 2012. "Even small trade costs restore efficiency in tax competition," Journal of Urban Economics, Elsevier, vol. 72(2), pages 191-195.
    15. repec:mje:mjejnl:v:14:y:2018:i:1:p:133-141 is not listed on IDEAS
    16. Peter Egger & Horst Raff, 2015. "Tax rate and tax base competition for foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 777-810, October.
    17. Gresik, Thomas A., 2016. "Allowing firms to choose between separate accounting and formula apportionment taxation," Journal of Public Economics, Elsevier, vol. 138(C), pages 32-42.
    18. Martina Baumann & Tobias Böhm & Bodo Knoll & Nadine Riedel, 2018. "Corporate Taxes, Patent Shifting and Anti-Avoidance Rules: Empirical Evidence," CESifo Working Paper Series 6967, CESifo Group Munich.
    19. Avdiu, Besart, 2018. "Optimal capital and labor income taxation in small and developing countries," MPRA Paper 84884, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • 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
    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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