Tax Competition in Presence of Profit Shifting

Steeve Mongrain, David Oh and Tanguy van Ypersele
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David Oh: Canada Mortgage and Housing Corporation

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: The popular view is that governments should crack down on tax avoidance by multinational firms. In this paper, we analyze how anti-profit-shifting policies influence fiscal competition. Governments commit to profit shifting control effort and then set taxes on capital. Equilibrium tax rates are determined by the elasticities of the two components: profit shifting and capital mobility. Anti-profit-shifting policies decrease the elasticity of the first but increase the elasticity of the second, so that the impact of these policies on the equilibrium of the tax game is ambiguous. We show that there are cases in which laxer policies increase all equilibrium tax rates and that the country announcing laxer profit shifting policies may gain. It appears that there is not always a pure strategy equilibrium in such a fiscal competition game. We construct a mixed strategy equilibrium when the pure strategy equilibrium does not exist.

Keywords: Tax competition; Profit shifting; International taxation; Capital mobility (search for similar items in EconPapers)
JEL-codes: F23 F38 H25 H26 H87 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-gth, nep-pbe and nep-pub
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Tax competition in the presence of profit shifting (2023)
Working Paper: Tax competition in the presence of profit shifting (2023)
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