Incentives to Tax Foreign Investors

Rishi Sharma

No 2016-02, Working Papers from Department of Economics, Colgate University

Abstract: This paper shows that a small country can have incentives to tax inbound FDI even in a setting with perfect competition and free entry. While firms make no aggregate profits worldwide due to free entry, they make taxable profits in foreign production locations because their costs are partly incurred in their home countries. These profits are not perfectly mobile because firm productivity varies across locations. Consequently, the host country does not bear the entire burden of a tax on foreign firms, giving rise to an incentive to impose taxes. The standard zero optimal tax result can be recovered in this model under an apportionment system that ensures zero economic profits in each location.

Keywords: international taxation; foreign direct investment; firm heterogeneity; tax competition (search for similar items in EconPapers)
JEL-codes: F23 H25 H87 (search for similar items in EconPapers)
Date: 2016-01-01, Revised 2016-09-13
New Economics Papers: this item is included in nep-int and nep-pbe
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Citations: View citations in EconPapers (2)

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Journal Article: Incentives to tax foreign investors (2019)
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