Premium
How Profit Shifting May Increase the Tax Burden of Multinationals: A Simple Model with Discrete Investment Choices
Author(s) -
STÖWHASE SVEN
Publication year - 2013
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12014
Subject(s) - multinational corporation , profit (economics) , stackelberg competition , economics , microeconomics , tax revenue , revenue , net profit , tax rate , corporate tax , monetary economics , business , industrial organization , tax reform , public economics , tax avoidance , finance
Abstract This paper models a Stackelberg tax setting game between two revenue‐maximizing countries which compete for the location of a single production plant owned by a multinational firm. We introduce the possibility of profit‐shifting activities by the multinational firm and investigate how a change in the costs of profit shifting affects equilibrium tax rates, revenue, and the tax burden of the multinational firm. We show that in most cases, tax rates of the two countries will be higher under profit shifting than without. If the costs for profit shifting are not too low, the strategic adjustment of profit tax rates will typically harm the multinational firm.