Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit taxes

Andreas Haufler and Frank Staehler ()
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Frank Staehler: University of Wuerzburg and CESifo
Authors registered in the RePEc Author Service: Frank Stähler

No 1020, Working Papers from Oxford University Centre for Business Taxation

Abstract: We set up a simple two-country model of tax competition where firms with different productivity decide in which location to produce and sell output. In this model a unique, asymmetric Nash equilibrium can be shown to exist, provided that countries are sufficiently different with respect to their exogenous market conditions. Sorting of firms occurs in equilibrium, as the smaller country levies the lower tax rate and attracts the low-cost ¯rms. A simultaneous expansion of both markets that raises the profitability of firms intensifies tax competition and causes both countries to reduce their tax rates, despite higher corporate tax bases. This finding corresponds to the empirical evidence for the OECD countries over the last two decades.

Date: 2010
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Related works:
Journal Article: TAX COMPETITION IN A SIMPLE MODEL WITH HETEROGENEOUS FIRMS: HOW LARGER MARKETS REDUCE PROFIT TAXES (2013)
Working Paper: Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit Taxes (2013)
Working Paper: Tax Competition in a Simple Model with Heterogeneous Firms: How Larger Markets Reduce Profit Taxes (2009)
Working Paper: Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit taxes (2009)
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