Heterogeneous Firms, 'Profit Shifting' FDI and International Tax Competition

Sebastian Krautheim () and Tim Schmidt-Eisenlohr ()

No ECO2009/15, Economics Working Papers from European University Institute

Abstract: 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 out flows of the tax base and can set higher tax rates.

Keywords: heterogeneous firms; monopolistic competition; tax competition; tax havens (search for similar items in EconPapers)
JEL-codes: F23 H25 H87 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-pbe
Date: 2009
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