Firms' financial choices and thin capitalization rules under corporate tax competition

Andreas Haufler and Marco Runkel ()

European Economic Review, 2012, vol. 56, issue 6, 1087-1103

Abstract: Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium, each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.

Keywords: Tax competition; Thin capitalization; Capital structure (search for similar items in EconPapers)
JEL-codes: F23 H25 H73 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (60)

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Related works:
Working Paper: Firms’ financial choices and thin capitalization rules under corporate tax competition (2012)
Working Paper: Firms' financial choices and thin capitalization rules under corporate tax competition (2008)
Working Paper: Firms’ Financial Choices and Thin Capitalization Rules under Corporate Tax Competition (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:56:y:2012:i:6:p:1087-1103

DOI: 10.1016/j.euroecorev.2012.03.005

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