Working Paper: CEPR ID: DP18194
Authors: Jianpeng Deng; Chong Liu; Zi Wang; Yuan Zi
Abstract: We study the implications of the presence of foreign multinationals on regional corporate tax policies of a country. We develop and estimate a quantitative spatial model with multinational production (MP) and local corporate taxes. Exploiting China's corporate tax reform in 2008, we find that firm productions across regions within China are twice as footloose as they are across countries. The counterfactual analysis shows that (i) China's 2008 corporate tax reform shifted foreign-firm productions to western provinces and increased Chinese welfare by 0.80%; (ii) regional tax competition would significantly reduce China's corporate tax revenue, lowering the welfare by 5.57%; (iii) the optimal corporate tax schedule would increase Chinese welfare by 3.28%. Finally, without the presence of foreign multinationals, the welfare loss from regional tax competition would be 2.04%, while the gain from the optimal corporate taxes would be only 0.08%.
Keywords: multinational firms; corporate taxes; tax competition; optimal taxes; spatial model
JEL Codes: F23; F61; H21; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 2008 corporate tax reform (G38) | shift of foreign firm productions to western provinces (F23) |
| shift of foreign firm productions to western provinces (F23) | increase in Chinese welfare (I38) |
| regional tax competition (H73) | decrease in China's corporate tax revenue (H29) |
| decrease in China's corporate tax revenue (H29) | decrease in welfare (I38) |
| optimal corporate tax schedule (H21) | increase in Chinese welfare (I38) |
| absence of foreign multinationals (F23) | welfare loss from regional tax competition (H21) |
| optimal corporate taxes (H21) | minimal gain in welfare (D69) |