Wages and International Tax Competition

Sebastian Krautheim and Tim Schmidt-Eisenlohr

No 1123, Working Papers from Oxford University Centre for Business Taxation

Abstract: Firms generating larger surpluses on average pay higher wages. We study the effect of this rent-sharing between firms and workers on international tax competition. In our model, firms in a large country can shift surplus to a tax haven. In the benchmark case firms only have a tax incentive for profit shifting as shifted surplus is fully taken into account in the wage bargaining. In this case rent-sharing decreases the competitive pressure on the large country and leads to higher equilibrium tax rates. When workers do not observe the full surplus shifted, a wage incentive arises. Profit shifting then becomes more attractive as it reduces the surplus bargained over with workers. If this effect is sufficiently strong, rent-sharing increases the competitive pressure on the large country, which implies a lower equilibrium tax rate.

Keywords: wages; tax competition; rent-sharing; profit shifting; tax havens (search for similar items in EconPapers)
JEL-codes: F23 H25 H73 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Wages and International Tax Competition (2016)
Working Paper: Wages and International Tax Competition (2012)
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