Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104286
Authors: 
Haufler, Andreas
Stähler, Frank
Year of Publication: 
2009
Series/Report no.: 
Munich Discussion Paper 2009-19
Abstract: 
An important puzzle in corporate taxation is that effective tax rates have fallen significantly while tax revenue has simultaneously risen in most countries. Moreover, the gross profitability of firms seems to be lower in high-tax countries, even though standard models of international investment would yield the opposite conclusion. We offer an explanation for these stylized facts by setting up a simple two-country model of tax competition with heterogenous firms. In this model a unique, asymmetric Nash equilibrium can be shown to exist, provided that countries are sufficiently different with respect to their exogenous market conditions. In equilibrium the larger country levies the higher tax rate and attracts the high-cost firms. A simultaneous expansion of both markets intensifies tax competition and causes both countries to reduce their tax rates, despite higher corporate tax bases.
Subjects: 
tax competition
heterogeneous firms
imperfect competition
JEL: 
H25
H73
F15
F21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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