Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit taxes

Andreas Haufler and Frank Stähler

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: An important puzzle in corporate taxation is that effective tax rates have fallen significantly while tax revenue has simultaneously risen in most countries. Moreover, the gross profitability of firms seems to be lower in high-tax countries, even though standard models of international investment would yield the opposite conclusion. We offer an explanation for these stylized facts by setting up a simple two-country model of tax competition with heterogenous firms. In this model a unique, asymmetric Nash equilibrium can be shown to exist, provided that countries are sufficiently different with respect to their exogenous market conditions. In equilibrium the larger country levies the higher tax rate and attracts the high-cost firms. A simultaneous expansion of both markets intensifies tax competition and causes both countries to reduce their tax rates, despite higher corporate tax bases.

Keywords: tax competition; heterogeneous firms; imperfect competition (search for similar items in EconPapers)
JEL-codes: F15 F21 H25 H73 (search for similar items in EconPapers)
Date: 2009-11-23
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://epub.ub.uni-muenchen.de/11120/1/heterogen-munichecon.pdf (application/pdf)

Related works:
Journal Article: TAX COMPETITION IN A SIMPLE MODEL WITH HETEROGENEOUS FIRMS: HOW LARGER MARKETS REDUCE PROFIT TAXES (2013)
Working Paper: Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit Taxes (2013)
Working Paper: Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit taxes (2010)
Working Paper: Tax Competition in a Simple Model with Heterogeneous Firms: How Larger Markets Reduce Profit Taxes (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:11120

Access Statistics for this paper

More papers in Discussion Papers in Economics from University of Munich, Department of Economics Ludwigstr. 28, 80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Tamilla Benkelberg ().