Heterogeneous firms, 'profit shifting' FDI and international tax competition

Sebastian Krautheim, Tim Schmidt-Eisenlohr

Research output: Contribution to journalArticle

Abstract

Larger firms are more likely to use tax haven operations to exploit international tax differences. We study tax competition between a large country and a tax haven. In the large country, heterogeneous firms operate under monopolistic competition and can choose to shift profits abroad. We show that a higher degree of firm heterogeneity (a mean-preserving spread of the cost distribution) increases the degree of tax competition, i.e. it decreases the equilibrium tax rate of the large country, leads to higher outflows of its tax base and thus decreases its equilibrium tax revenues. Similar effects hold for a higher substitutability across varieties.

Original languageEnglish (US)
Pages (from-to)122-133
Number of pages12
JournalJournal of Public Economics
Volume95
Issue number1-2
DOIs
StatePublished - Feb 2011

Keywords

  • Heterogeneous firms
  • Profit shifting
  • Tax competition
  • Tax havens

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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