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.
|Journal||Journal of Development Economics|
|Early online date||24 Apr 2020|
|Publication status||Published - 30 Sept 2020|
- Asymmetric countries
- Country risk
- Developing countries
- Tax competition
ASJC Scopus subject areas
- Economics and Econometrics
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- Department of Economics - Senior Lecturer
Person: Research & Teaching