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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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  9. Roger H. Gordon & Jeffrey K. Mackie-Mason, . "Why is There Corporate Taxation in a Small Open Economy? The Role of Transfer Pricing and Income Shifting," EPRU Working Paper Series 93-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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  16. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-92, September.
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  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. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  21. Kashif S. Mansori & Alfons J. Weichenrieder, 2001. "Tax Competition and Transfer Pricing Disputes," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(1), pages 1-, December.
  22. Demirgüç-Kunt, Asli & Huizinga, Harry, 2001. "The taxation of domestic and foreign banking," Journal of Public Economics, Elsevier, vol. 79(3), pages 429-453, March.
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