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Unilateral tax reform: Border adjusted taxes, cash flow taxes, and transfer pricing

Eric Bond () and Thomas Gresik ()

Journal of Public Economics, 2020, vol. 184, issue C

Abstract: We study the economic effects of unilateral adoption of corporate tax policies that include the choice between destination-based and source-based taxation and between cash flow and income taxes. We utilize a heterogeneous firm model in which monopolistically competitive North firms choose whether to outsource an intermediate good to an unrelated South firm or to produce in a subsidiary in the South. Standard pass through arguments no longer apply because of the income shifting behavior of multinationals and endogenous choice of organizational form. The high tax North country will prefer a destination-based tax over a source-based tax if it adopts a cash flow tax, but whether the cash flow tax is preferred to an income tax will depend on the volume of trade in the differentiated products sector. If the high tax country adopts a destination-based cash flow tax, the low tax country will prefer a destination-based income tax to capture rents from the foreign subsidiaries.

Keywords: Border adjustments; Destination-based taxes; Source-based taxes; Cash flow taxes; Income taxes; Transfer pricing; Unilateral tax reform (search for similar items in EconPapers)
JEL-codes: F23 H21 H25 H26 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:184:y:2020:i:c:s0047272720300244

DOI: 10.1016/j.jpubeco.2020.104160

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