Working Paper: NBER ID: w4690
Authors: Roger H. Gordon; Jeffrey K. Mackie-Mason
Abstract: Several recent papers argue that corporate income taxes should not be used by small, open economies. With capital mobility, the burden of the tax falls on fixed factors (e.g., labor), and the tax system is more efficient if labor is taxed directly. However, corporate taxes not only exist but rates are roughly comparable with the top personal tax rates. Past models also forecast that multinationals should not invest in countries with low corporate tax rates, since the surtax they owe when profits are repatriated puts them at a competitive disadvantage. Yet such foreign direct investment is substantial. We suggest that the resolution of these puzzles may be found in the role of income shifting, both domestic (between the personal and corporate tax bases) and cross-border (through transfer pricing). Countries need cash-flow corporate taxes as a backstop to labor taxes to discourage individuals from converting their labor income into otherwise untaxed corporate income. We explore how these taxes can best be modified to deal as well with cross-border shifting.
Keywords: Corporate Taxation; Income Shifting; Transfer Pricing; Small Open Economies
JEL Codes: H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate taxation (H25) | Income shifting behavior (H32) |
| Labor income tax rate (J39) | Optimal corporate tax rate (H21) |
| Tax policy design (H29) | Corporate income shifting practices (H22) |
| Corporate taxes (H29) | Conversion of labor income into corporate income (E25) |
| Transfer pricing (F16) | Tax policy adjustment (H29) |