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Asymmetric Capital Tax Competition with Profit Shifting

  • Stöwhase, Sven

This paper analyses capital tax competition between jurisdictions of different size when multinational firms can shift some fraction of their tax base between them. For the case of revenue maximizing governments, we show that introducing profit shifting will not generally increase downward pressure on tax rates. We find that profit shifting decreases the tax-base elasticity of the low tax jurisdiction while increasing the elasticity of the high tax jurisdiction. Therefore, by the direct (impact) effect, tax rates will converge as a result of additional profit shifting opportunities. In general equilibrium, however, tax rates may decrease or increase in both jurisdictions.

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File URL: http://epub.ub.uni-muenchen.de/454/1/Asymprofit_dp.pdf
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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 454.

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Date of creation: Dec 2004
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Handle: RePEc:lmu:muenec:454
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  1. Harry Grubert & Joel Slemrod, 1998. "The Effect Of Taxes On Investment And Income Shifting To Puerto Rico," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 365-373, August.
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  17. James R. Hines, Jr., 1996. "Tax Policy and the Activities of Multinational Corporations," NBER Working Papers 5589, National Bureau of Economic Research, Inc.
  18. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "The Effects of Taxation on Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-2, August.
  19. Garrett, Geoffrey, 1995. "Capital mobility, trade, and the domestic politics of economic policy," International Organization, Cambridge University Press, vol. 49(04), pages 657-687, September.
  20. Eric J. Bartelsman & Roel Beetsma, 2000. "Why Pay More? Corporate Tax Avoidance through Transfer Pricing in OECD Countries," CESifo Working Paper Series 324, CESifo Group Munich.
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