Working Paper: CEPR ID: DP4312
Authors: Hans Jarle Kind; Karen Helene Midelfart; Guttorm Schjelderup
Abstract: The rising importance of multinationals in the world economy has been accompanied by a rise in trade between affiliates of multinationals located in different countries, and by profits being shifted to low tax countries. The effect of trade barriers on taxation, intra firm trade and profit shifting has largely been ignored by both the trade literature and the public finance literature. This Paper analyses how competition over shifty profits affects tax policy as trade barriers are lowered. The main results are: (i) a reduction in trade barriers unambiguously leads to higher tax revenue for low or intermediate levels of trade costs; and (ii) that the effect on equilibrium tax rates depends on the proportion of the corporate tax bases that is foreign owned and how far economic integration has proceeded.
Keywords: multinationals; tax competition; trade
JEL Codes: F21; F23; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in trade barriers (F13) | Higher tax revenue (H29) |
| Economic integration (F15) | Higher corporate tax revenue (H29) |
| Economic integration (F15) | Ambiguous effect on tax rates (H31) |
| Ownership structure of corporate tax base (G32) | Effect on equilibrium tax rates (H31) |
| Lower trade barriers (F19) | Corporate tax base becomes more tax-sensitive (H32) |
| Equilibrium tax rate (H21) | Increasing in marginal utility of public funds (H49) |
| Equilibrium tax rate (H21) | Decreasing in ownership of domestic multinational (F23) |