Abstract
The standard tax theory result that investment should not be distorted is based on the assumption that profits are locally bound. In this paper, we analyze the optimal tax policy in a model where firms are internationally mobile. We show that the optimal policy response to increasing firm mobility may be taxation, subsidization, or non-distortion of the marginal investment, depending on whether the mobile firms are more or less profitable than the average firm in the economy. Our findings may contribute to understanding recent tax policy developments in many OECD countries.
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We thank J. Wilson and an anonymous referee as well as G. Schjelderup and participants at various research workshops for very helpful comments. All remaining errors are our own. We gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft (DFG), Grant No. FU 442/3-1, and the ESRC, Grant No RES -060-25-0033.
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Becker, J., Fuest, C. Optimal tax policy when firms are internationally mobile. Int Tax Public Finance 18, 580–604 (2011). https://doi.org/10.1007/s10797-011-9168-x
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DOI: https://doi.org/10.1007/s10797-011-9168-x