International tax leadership among asymmetric countries
Jean Hindriks () and
Yukihiro Nishimura ()
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Yukihiro Nishimura: Osaka University, Graduate School of Economics, Japan
No 2014028, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)
Multinational companies can shift profit and income between branches in order to reduce the overall tax liabilities of the company. The result is a tax competition between countries. In this paper we consider the sequential choice of tax rates to illustrate the potential effects of tax leadership. We use a profit shifting model with multinational firms that operate in two countries, large and small. Governments compete by setting source-based corporate income taxes. We show that: (i) the sequential tax equilibria always Pareto dominate the simultaneous tax equilibrium. (ii) Each country prefers to follow than to lead the tax game. (iii) The tax leadership by the large country risk-dominates the tax leadership by the small country. Therefore our analysis provides a plausible explanation for the endogenous emergence of the tax leader- ship by the large countries. The results are contrasting with previous results in the literature.
Keywords: profit shifting; tax competition; endogenous timing; second-mover advantage; risk-dominance (search for similar items in EconPapers)
JEL-codes: C72 F23 F68 H25 H87 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2014028
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