Heterogeneous Firms, `Profit Shifting‘ FDI and International Tax Competition
Title: Heterogeneous Firms, `Profit Shifting‘ FDI and International Tax Competition
Publisher: European University Institute
Series/Number: EUI ECO; 2009/15
We develop a stylized model of international tax competition between a large country and a tax haven. In the large country, firms in a monopolistically competitive industry generate positive profits which can be taxed by the government. Firms have heterogeneous productivity levels and can choose to undertake ‘profit shifting’ FDI in order to benefit from lower tax rates abroad. We find that economies with a low degree of firm heterogeneity and a high degree of monopolistic market power are less affected by international tax competition. They face lower outflows of the tax base and can set higher tax rates.
Subject: heterogeneous firms; monopolistic competition; tax competition; tax havens; F23; H25; H87
We are grateful to Giancarlo Corsetti, Omar Licandro and Morten Ravn for constant advice. We would also like to thank Jonathan Eaton, Vincent Rebeyrol, Karolina Ekholm, guest researchers at the Deutsche Bundesbank, participants at the EUI Macro Group and the PSE International Trade lunchtime seminar for fruitful discussions and comments.
Type of Access: openAccess