Asymmetric tax competition with formula apportionment
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This paper analyzes asymmetric tax competition under formula apportionment. It sets up a model with multinationals where two welfare-maximizing jurisdictions of different size levy source-based corporate taxes and allocate taxes using the formula approach. At the Nash equilibrium, tax rates are too low and public goods quantities are too small. The paper shows that the (marginally) larger country levies a larger tax rate compared to the smaller country. Citizens of the larger country are worse off than those of the smaller country. The larger country employs inefficiently little capital.
KeywordsMultinational enterprises Corporate taxation Formula apportionment Asymmetric tax competition
JEL ClassificationH25 H42 H73
I have greatly benefited from the comments of the editor of this journal, Amitrajeet A Batabyal, and two anonymous reviewers.
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