Working Paper: NBER ID: w19579
Authors: Alan J. Auerbach; Michael P. Devereux
Abstract: We model the effects of consumption-type taxes which differ according to the base and location of the tax. Our model incorporates a multinational producing and selling in two countries with three sources of rent, each in a different location: a fixed basic production factor (located with initial production), mobile managerial skill, and a fixed final production factor (located with consumption). In the general case, we show that for national governments, there are trade-offs in choosing between alternative taxes. In particular, a cash-flow tax on a source basis creates welfare-impairing distortions to production and consumption, but is partially incident on the owners of domestic production who may be non-resident. By contrast, a destination-based cash-flow tax does not distort behavior, but is incident only on domestic residents. In the alternative case with the returns to the fixed factors accruing to domestic residents, the only distortion from the source-based tax is through the allocation of the mobile managerial skill. In this case, the source-based tax is also incident only on domestic residents, and is dominated by an equivalent tax on a destination basis.
Keywords: Consumption-type taxation; Cashflow tax; International tax policy; Multinational firms
JEL Codes: F23; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| source-based cashflow tax (H25) | distortions in production and consumption (F61) |
| distortions in production and consumption (F61) | welfare loss (D69) |
| higher source-based tax rates (H29) | shift production to lower-tax jurisdictions (H26) |
| source-based cashflow tax (H25) | misallocation of resources (D61) |
| destination-based cashflow tax (H29) | no distortions in production behavior (D20) |
| destination-based cashflow tax (H29) | efficient tax structure (H21) |
| returns to fixed factors accrue to domestic residents (D33) | switch to a destination-based tax would be beneficial (H29) |
| non-cooperative setting of tax policy choices (H26) | trade-off between taxing non-residents and deadweight loss from production distortions (H21) |