Factor Taxation, Income Distribution and Capital Market Integration

This paper addresses the optimal mix of capital and wage taxation when policymakers maximize the political support of workers and capitalists, subject to a fixed revenue requirement. Capital market integration increases the efficiency costs of a tax on capital but simultaneously changes the political equilibrium through its effect on the distribution of factor incomes. These distributional effects are directly opposed in the capital importing and the capital exporting region. While the capital tax rate will always be lowered in the capital importing region, the tax rate in the exporting country will rise when political resistance to market-induced changes in the distribution of income is sufficiently high.     

International Commodity Taxation under Monopolistic Competition

We analyze non‐cooperative commodity taxation in a two‐country trade model characterized by monopolistic competition and international firm and capital mobility. In this setting, taxes in one country affect foreign welfare through the relocation of mobile firms and through changes in the rents accruing to capital owners. With consumption‐based taxation, these fiscal externalities exactly offset each other and the non‐cooperative tax equilibrium is Pareto efficient. With production‐based taxation, however, there are additional externalities on the foreign tax base and the foreign price level that lead non‐cooperative tax rates to exceed their Pareto efficient levels.     

Merger policy and tax competition: the role of foreign firm ownership

In many situations, governments have sector-specific tax and regulation policies at their disposal to influence the market outcome after a national or an international merger has taken place. In this paper we study the implications for merger policy when countries non-cooperatively deploy production-based taxes and firms may be partly owned by foreigners. We find that when foreign firm ownership is low in the pre-merger situation, non-cooperative tax policies are more efficient after a national merger, and smaller synergy effects are needed for this type of merger to be proposed and cleared. In contrast, cross-border mergers dominate when the degree of foreign firm ownership is high initially. These results suggest a link between increasing international portfolio diversification and the rising share of cross-border mergers.     

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

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.     

The effects of regional tax and subsidy coordination on foreign direct investment

This paper analyses the effects of a regionally coordinated profit tax or location subsidy in a model with three active countries, one of which is not part of the union, and a globally mobile firm. We show that regional coordination can lead to two types of welfare gain. First, for investments that would take place in the union in the absence of coordination, a coordinated tax increase can transfer location rents from the firm to the union. Second, by internalising all of the union's benefits from foreign direct investment, a coordinated tax reduction can attract more welfare-enhancing investment than when member states act in isolation. Depending on which motive dominates, tax levels may thus rise or fall under regional coordination.     

TAX COMPETITION IN A SIMPLE MODEL WITH HETEROGENEOUS FIRMS: HOW LARGER MARKETS REDUCE PROFIT TAXES*

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 is shown to exist, provided that countries are sufficiently different with respect to their exogenous market size. Sorting of firms occurs in equilibrium, as the smaller country levies the lower tax rate and attracts the low‐cost firms. 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.     

Corporate tax systems and cross country profit shifting

The paper analyses optimal taxation of corporate profits whengovernments can choose both the rate and the base of the corporationtax, but are constrained to collect a given amount of corporatetax revenue. In a standard two-period model of investment andinternational mobility of portfolio capital only, the optimaltax system allows a full deduction for the costs of capital.When foreign direct investment is permitted, however, and firmscan shift profits between countries through transfer pricing,it will be optimal for each government to distort investmentdecisions in order to reduce tax rates and limit the incentivefor profit shifting.     

Competition for firms in an oligopolistic industry: The impact of economic integration

We set up a model of generalised oligopoly where two countries of different size compete for an exogenous, but variable, number of identical firms. The model combines a desire by national governments to attract internationally mobile firms with the existence of location rents that arise even in a symmetric equilibrium where firms are dispersed. As economic integration proceeds, equilibrium taxes initially decline, but then rise again as trade costs fall even further. A range of trade costs is identified where economic integration raises the welfare of the small country, but lowers welfare in the large country.     

Dynamic effects of an anticipated switch from destination- to origin-based commodity taxation

This paper investigates the macroeconomic and welfare effects of an anticipated future switch from destination- to origin-based commodity taxation. We set up an intertemporal representative-agent model of an open economy and study especially consumption, investment, and trade-balance responses to the commodity-tax reform. The anticipation effects on the macroeconomy are significant, whereas their welfare implications are not.