Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed?

We analyze a sequential game between two symmetric countries when firms can invest in a multinational structure that confers tax savings. Governments are able to commit to long-run tax discrimination policies before firms' decisions are made and before statutory capital tax rates are chosen non-cooperatively. Whether a coordinated reduction in the tax preferences granted to mobile firms is beneficial or harmful for the competing countries depends critically on the elasticity with which the firms' organizational structure responds to tax discrimination incentives. The model can be applied to recent policy initiatives that aim at a ban on preferential tax regimes and at reducing the profit shifting opportunities for multinational firms

Preferential tax regimes with asymmetric countries

Current policy initiatives taken by the EU and the OECD aim at abolishing preferential corporate tax regimes. This note extends Keen's (2001) analysis of symmetric capital tax competition under preferential (or discriminatory) and non-discriminatory tax regimes to allow for countries of different size. Even though size asymmetries imply a redistribution of tax revenue from the larger to the smaller country, a non-discrimination policy is found to have similar effects as in the symmetric model: it lowers the average rate of capital taxation and thus makes tax competition more aggressive in both the large and the small country

The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions

This paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments, regardless of a wide variety of differences in regional tax capacity, tastes for public spending, and population. Thus, compared to other corrective devices, equalization achieves “robust” implementation. If aggregate tax bases are elastic, however, equalization leads to excessive taxation. Efficiency can be achieved by a modified formula that equalizes a fraction of local revenue deficiencies equal to the fraction of taxes that are shifted backward to factor suppliers.tax competition, intergovernmental grants

Peer Group Effects, Sorting, and Fiscal Federalism

Suppose that, other things equal, an individual's utility increases with the fraction of residents in his community who are rich. Suppose further that the rich are more willing to pay for a local public than are the poor Then the rich may over-provide a local public good, with the aim of dissuading the poor from moving into a community inhabited by the rich. We describe conditions under which the equilibrium will have mixed or homogeneous communities, and conditions under which the rich or the poor benefit from central government rules which constrain local decision making.Status; Migration

Preferential tax regimes with asymmetric countries

Current policy initiatives taken by the EU and the OECD aim at abolishing preferential corporate tax regimes. This note extends Keen's (2001) analysis of symmetric capital tax competition under preferential (or discriminatory) and non-discriminatory tax regimes to allow for countries of different size. Even though size asymmetries imply a redistribution of tax revenue from the larger to the smaller country, a non-discrimination policy is found to have similar effects as in the symmetric model: it lowers the average rate of capital taxation and thus makes tax competition more aggressive in both the large and the small country.corporate taxation; preferential tax regimes

Tax Competition when Firms Choose their Organizational Form: Should Tax Loopholes for Multinationals be Closed?

We analyze a sequential game between two symmetric countries when firms can invest in a multinational structure that confers tax savings. Governments are able to commit to long-run tax discrimination policies before firms' decisions are made and before statutory capital tax rates are chosen non-cooperatively. Whether a coordinated reduction in the tax preferences granted to mobile firms is beneficial or harmful for the competing countries depends critically on the elasticity with which the firms' organizational structure responds to tax discrimination incentives. The model can be applied to policy initiatives that aim at a ban on preferential tax regimes and at reducing the profit shifting opportunities for multinational firms.tax competition, multinational firms, preferential treatment

Preferential Tax Regimes with Asymmetric Countries

Current policy initiatives taken by the EU and the OECD aim at abolishing preferential corporate tax regimes. This note extends Keen's (2001) analysis of symmetric capital tax competition under preferential (or discriminatory) and non-discriminatory tax regimes to allow for countries of different size. Even though size asymmetries imply a redistribution of tax revenue from the larger to the smaller country, a non-discrimination policy is found to have similar effects as in the symmetric model: it lowers the average rate of capital taxation and thus makes tax competition more aggressive in both the large and the small country.corporate taxation, preferential tax regimes

Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed?

We analyze a sequential game between two symmetric countries when firms can invest in a multinational structure that confers tax savings. Governments are able to commit to long-run tax discrimination policies before firms' decisions are made and before statutory capital tax rates are chosen non-cooperatively. Whether a coordinated reduction in the tax preferences granted to mobile firms is beneficial or harmful for the competing countries depends critically on the elasticity with which the firms' organizational structure responds to tax discrimination incentives. The model can be applied to recent policy initiatives that aim at a ban on preferential tax regimes and at reducing the profit shifting opportunities for multinational firms.tax competition; multinational firms; preferential treatment