Working Paper: CEPR ID: DP416
Authors: Alberto Giovannini; James R. Hines Jr.
Abstract: This paper discusses a model corporate tax system based on the application of the residence principle. This tax system, while preserving national sovereignties, minimizes the distortions arising from international capital mobility. The paper is motivated by an analysis of European capital income tax systems, and of the distortions that might arise as obstacles to international capital flows diminish. The alternative system that we analyse has two main properties: it exploits the territoriality of law enforcement, and it allows countries to set the corporate tax rate -- and the extent of double taxation of corporate income -- independently.
Keywords: corporate income tax; foreign tax credit; international capital mobility; foreign direct investment; completion of the internal market
JEL Codes: 320; 440
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased international capital mobility (F21) | decreased effectiveness of traditional tax systems (H26) |
| disparate capital tax systems in Europe (F38) | inefficiencies and distortions in capital allocation (D61) |
| increased capital mobility (F20) | lower tax revenues (H29) |
| lack of cooperation among tax authorities (H26) | increased tax evasion and avoidance (H26) |
| lack of cooperation among tax authorities (H26) | significant revenue losses (H27) |
| proposed model of residence-based corporate taxation (H32) | minimized distortions from international capital mobility (F32) |
| proposed model of residence-based corporate taxation (H32) | effective addressing of revenue shortfalls (H27) |
| proposed model (uniform tax rates and elimination of withholding taxes) (H29) | effective reallocation of corporate income taxes (H23) |