Tax competition between developed, emerging, and developing countries – Same same but different?

Michael Stimmelmayr, Mohammed Mardan

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Abstract

This paper analyzes tax competition between countries, which differ in their country-specific risks. We show that the outcome of asymmetric tax competition crucially depends on the ability of multinational firms to shift profits. With high costs of profit shifting, higher-risk countries set lower tax rates than lower-risk countries whereas the opposite is true if the costs of profit shifting are low. The results provide an explanation for the patterns observed in the corporate income tax policies across countries differing in their level of development. Moreover, for intermediate costs of profit shifting, we show that countries' absolute risk level plays an important role in tax rate setting. These results carry important implication for the empirical tax competition literature.
Original languageEnglish
Article number102491
JournalJournal of Development Economics
Volume146
Early online date24 Apr 2020
DOIs
Publication statusPublished - 30 Sep 2020

Keywords

  • Asymmetric countries
  • Country risk
  • Developing countries
  • Tax competition

ASJC Scopus subject areas

  • Development
  • Economics and Econometrics

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