Wages and International Tax Competition

Krautheim, Sebastian and Schmidt-Eisenlohr, Tim (2011) Wages and International Tax Competition. Centre for Business Taxation WP 11/23.

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Abstract

Firms generating larger surpluses on average pay higher wages. We study the effect of this rent-sharing between firms and workers on international tax competition. In our model, firms in a large country can shift surplus to a tax haven. In the benchmark case firms only have a tax incentive for profit shifting as shifted surplus is fully taken into account in the wage bargaining. In this case rent-sharing decreases the competitive pressure on the large country and leads to higher equilibrium tax rates. When workers do not observe the full surplus shifted, a wage incentive arises. Profit shifting then becomes more attractive as it reduces the surplus bargained over with workers. If this effect is sufficiently strong, rent-sharing increases the competitive pressure on the large country, which implies a lower equilibrium tax rate.

Item Type: Other Working Paper
Keywords: wages, tax competition, rent-sharing, profit shifting, tax havens
Centre: Oxford University Centre for Business Taxation > CBT Working Papers
Date Deposited: 24 Apr 2012 15:52
Last Modified: 15 Oct 2015 02:18
URI: http://eureka.sbs.ox.ac.uk/id/eprint/3206

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