Economic Integration and Redistributive Taxation: A Simple Model with Ambiguous Results

Andreas Haufler, Alexander Klemm and Guttorm Schjelderup

No 1853, CESifo Working Paper Series from CESifo

Abstract: The rise in foreign direct investment and the increasing activity of multinational firms expose national corporate tax bases to cross-country profit shifting, but also lead to rising profitability of the corporate sector. We incorporate these two effects of economic integration into a simple political economy model where the median voter decides on a redistributive income tax rate. In this setting economic integration may raise or lower the equilibrium tax rate, depending on whether the higher excess burden of the tax or the larger redistributive gains from the perspective of the representative worker are the dominant effect. Our simple model holds several implications for future empirical work on the relationship between globalization and the effective rate of capital taxation.

Keywords: redistributive taxation; multinational firms; profit shifting (search for similar items in EconPapers)
JEL-codes: F23 H20 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-int and nep-pbe
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