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Why the European Union Should Adopt Formula Apportionment with a Sales Factor *
Author(s) -
Eichner Thomas,
Runkel Marco
Publication year - 2008
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2008.00551.x
Subject(s) - apportionment , economics , euros , tax competition , welfare , externality , european union , value added tax , tax revenue , multinational corporation , revenue , international economics , double taxation , public economics , microeconomics , ad valorem tax , monetary economics , finance , market economy , philosophy , political science , humanities , law
Using a two‐country tax competition model with a multinational enterprise (MNE), this paper addresses the question of whether the European Union should replace separate accounting (SA) in corporate income taxation by formula apportionment (FA) and, if so, which apportionment factors should be used. Our main result is that FA with a sales factor may mitigate or even eliminate fiscal externalities caused by the countries' tax policy. Hence, our analysis provides a microfoundation for the sales apportionment factor. In an empirical calibration to the EU‐15 we show that the transition from SA to FA with a sales‐only formula raises average tax rates by 2% and average tax revenues by 1 billion euros or 0.1% of GDP. These effects result in an increase of welfare.