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Title:Firms' financial choices and thin capitalization rules under corporate tax competition PDF Logo
Authors:Haufler, Andreas
Runkel, Marco
Issue Date:2008
Series/Report no.:CESifo working paper 2429
Abstract:Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.
Subjects:Thin capitalization
capital structure
tax competition
JEL:H73
H25
F23
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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