Why Do Most Countries Set High Tax Rates on Capital?

Abstract

We consider tax competition in a world with tax bases exhibiting different degrees of mobility, modeled as mobile and immobile capital. An agreement among countries not to give preferential treatment to mobile capital results in an equilibrium where mobile capital is nevertheless taxed relatively lightly. In particular, one or two of the smallest countries, measured by their stocks of immobile capital, choose relatively low tax rates, thereby attracting mobile capital away from the other countries, which are then left to set revenuemaximizing taxes on their immobile capital. This conclusion holds regardless of whether countries choose their tax policies sequentially or simultaneously. In contrast, unrestricted competition for mobile capital results in the preferential treatment of mobile capital by all countries, without cross-country differences in the taxation of mobile capital. Nevertheless our main result is that the non-preferential regime generates larger expected global tax revenue, despite the sizable revenue loss from the emergence of low-tax countries. By extending the analysis to include cross-country differences in productivities, we are able to resurrect a case for preferential regimes, but only if the productivity differences are sufficiently large.

Interjurisdictional Tax Competition in China

“…However, this result is shown to be quite consistent with the other measures of country size. For example, Marceau, Mongrain, and Wilson () model country size by the stocks of immobile capital, and obtain a similar result.…”

How Profit Shifting May Increase the Tax Burden of Multinationals: A Simple Model with Discrete Investment Choices

“…5 5 The assumption of Stackelberg competition is quite common in the more recent theoretical literature (see e.g., Borck and Plüger 2006, Marceau, Mongrain, and Wilson 2010). Empirical findings (Altshuler and Goodspeed 2002, Redoano 2007, de Mello 2008) support this position to some degree. …”

Lowering the Marginal Corporate Tax Rate: Why the Debate?

“…The main reason for the difference is that when itemising deductions, US‐based multinationals are allowed full deductibility of domestic expenses while allocating those expenses against foreign income for the purpose of calculating foreign tax credits (Hines ; Slemrod ). Foreign tax credits are much studied with respect to FDI asset management and global portfolio management (Bartelsman and Beetsma ; Bloom et al ; Herrmann and Lipsey ; Klassen et al ; Marceau et al ). The interest stems from the fact that foreign tax credits provide incentives for capital outflows and may discourage repatriation of profits earned abroad into the home economy.…”

“…Destructive inter‐state tax competition can occur when nations face incentives to compete for mobile capital by reducing their tax rates to a level that can result in inadequate public goods provision (Marceau et al ). This is a fair theoretical warning, but its applicability is nebulous since corporate taxes account for a fairly small percentage of public revenue sources (Ulbrich ).…”