TY - JOUR
T1 - Imperfect tax competition for profits, asymmetric equilibrium and beneficial tax havens
AU - Johannesen, Niels
N1 - JEL classification codes: F23, F21, H26, H87
PY - 2010/7
Y1 - 2010/7
N2 - We present a model of tax competition for real investment and profits and show that the presence of tax havens in some cases increases the tax revenue of countries. In the first part of the paper, we argue that tax competition for profits is likely to be imperfect in the sense that the jurisdiction with the lowest tax rate does not necessarily attract all shifted profits. Under this assumption, tax competition between a large number of identical countries may lead to either a symmetric equilibrium with no profit shifting or an asymmetric equilibrium where firms shift profits from high-tax to low-tax countries. In the second part of the paper, we introduce tax havens. Starting from a symmetric equilibrium, tax havens unambiguously reduce the tax revenue of countries due to a 'leakage effect' - tax havens attract tax base from countries - and a 'competition effect' - the optimal response to the increased tax sensitivity of tax bases involves a reduction of tax rates. Starting from an asymmetric equilibrium, however, tax havens also raise the tax revenue of countries through a 'crowding effect' - tax havens make it less attractive to compete for profits and thus induce low-tax countries to become high-tax countries. We demonstrate that the latter effect may dominate the former effects so that countries, on balance, benefit from the presence of tax havens.
AB - We present a model of tax competition for real investment and profits and show that the presence of tax havens in some cases increases the tax revenue of countries. In the first part of the paper, we argue that tax competition for profits is likely to be imperfect in the sense that the jurisdiction with the lowest tax rate does not necessarily attract all shifted profits. Under this assumption, tax competition between a large number of identical countries may lead to either a symmetric equilibrium with no profit shifting or an asymmetric equilibrium where firms shift profits from high-tax to low-tax countries. In the second part of the paper, we introduce tax havens. Starting from a symmetric equilibrium, tax havens unambiguously reduce the tax revenue of countries due to a 'leakage effect' - tax havens attract tax base from countries - and a 'competition effect' - the optimal response to the increased tax sensitivity of tax bases involves a reduction of tax rates. Starting from an asymmetric equilibrium, however, tax havens also raise the tax revenue of countries through a 'crowding effect' - tax havens make it less attractive to compete for profits and thus induce low-tax countries to become high-tax countries. We demonstrate that the latter effect may dominate the former effects so that countries, on balance, benefit from the presence of tax havens.
KW - Faculty of Social Sciences
KW - tax competition
KW - profit shifting
KW - tax havens
U2 - 10.1016/j.jinteco.2010.04.002
DO - 10.1016/j.jinteco.2010.04.002
M3 - Journal article
SN - 0022-1996
VL - 81
SP - 253
EP - 264
JO - Journal of International Economics
JF - Journal of International Economics
IS - 2
ER -