DP18194 Local Corporate Taxes and the Geography of Foreign Multinationals
We study the implications of the presence of foreign multinationals on regional corporate tax policies of a country. We develop and estimate a quantitative spatial model with multinational production (MP) and local corporate taxes. Exploiting China's corporate tax reform in 2008, we find that firm productions across regions within China are twice as footloose as they are across countries. The counterfactual analysis shows that (i) China's 2008 corporate tax reform shifted foreign-firm productions to western provinces and increased Chinese welfare by 0.80%; (ii) regional tax competition would significantly reduce China's corporate tax revenue, lowering the welfare by 5.57%; (iii) the optimal corporate tax schedule would increase Chinese welfare by 3.28%. Finally, without the presence of foreign multinationals, the welfare loss from regional tax competition would be 2.04%, while the gain from the optimal corporate taxes would be only 0.08%.