Local Corporate Taxes and the Geography of Foreign Multinationals

Jianpeng Deng, Chong Liu, Zi Wang and Yuan Zi

No 18194, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the implications of the presence of foreign multinationals on regional corporate tax policies of a country. We develop and estimate a quantitative spatial model with multinational production (MP) and local corporate taxes. Exploiting China's 2008 corporate tax reform, we find that firm production across regions is twice as footloose as estimates in the literature on cross-country production. Counterfactual analysis shows that (i) China's 2008 corporate tax reform shifted foreign-firm productions to western provinces and increased Chinese welfare by 0.86%; (ii) regional tax competition would significantly reduce China's corporate tax revenue, lowering welfare by 5.56%; (iii) the nationally optimal corporate tax schedule would increase Chinese welfare by 3.10%. Finally, without the presence of foreign multinationals, the welfare loss from regional tax competition would be 2.04%, while the gain from the nationally optimal corporate taxes would be only 0.06%.

Keywords: Multinational firms; Corporate taxes; Tax competition; Optimal taxes; Spatial models (search for similar items in EconPapers)
JEL-codes: F23 F61 H21 R13 (search for similar items in EconPapers)
Date: 2023-06
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