DP4312 Trade and Multinationals: The Effect of Economic Integration on Taxation and Tax Revenue

Author(s): Hans Jarle Kind, Guttorm Schjelderup, Karen-Helene Ulltveit-Moe
Publication Date: March 2004
Keyword(s): multinationals, tax competition, trade
JEL(s): F21, F23, H21
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4312

The rising importance of multinationals in the world economy has been accompanied by a rise in trade between affiliates of multinationals located in different countries, and by profits being shifted to low tax countries. The effect of trade barriers on taxation, intra firm trade and profit shifting has largely been ignored by both the trade literature and the public finance literature. This Paper analyses how competition over shifty profits affects tax policy as trade barriers are lowered. The main results are: (i) a reduction in trade barriers unambiguously leads to higher tax revenue for low or intermediate levels of trade costs; and (ii) that the effect on equilibrium tax rates depends on the proportion of the corporate tax bases that is foreign owned and how far economic integration has proceeded.