Why Is There Corporate Taxation In a Small Open Economy? The Role of Transfer Pricing and Income Shifting
Year: 1994
Type: report
Abstract: Several recent papers argue that corporate income taxes should not be used by small, open economies.With capital mobility, the burden of the tax falls on fixed factors (e.g., labor), and the tax system is more efficient if labor is taxed directly.However, corporate taxes not only exist but rates are roughly comparable with the top personal tax rates.Past models also forecast that multinationals should not invest in countries with low corporate tax rates, since the surtax they owe when profits are repatriated puts them at a competitive disadvantage.Yet such foreign direct investment is substantial.We suggest that the resolution of these puzzles may be found in the role of income shifting, both domestic (between the personal and corporate tax bases) and cross-border (through transfer pricing).Countries need cash-flow corporate taxes as a backstop to labor taxes to discourage individuals from converting their labor income into otherwise untaxed corporate income.We explore how these taxes can best be modified to deal as well with cross-border shifting.
DOI: 10.3386/w4690
Authors: Roger Gordon, Jeffrey MacKie-Mason
Institutions: National Bureau of Economic Research, University of Michigan
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
Funder: Universitetet i Oslo
OpenAlex ID: W1523049561