Taxing Multinationals under Union Wage Barganing

Riedel, Nadine (2011) Taxing Multinationals under Union Wage Barganing. Centre for Business Taxation WP 11/06.

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Abstract

This paper investigates corporate taxation under separate accounting (SA) and formula apportionment (FA) in a model with union wage bargaining and multinational firms. Under SA, we find that increases in the corporate tax rate raise the wage level of domestic workers, while they lower the remuneration of foreign workers. The main insight emerging from a tax competition game is that the endogeneous wage level gives rise to an ambiguous fiscal externality, which may dampen the race-to-the-bottom in corporate tax rates. A switch to a tax system with FA principles reverses the impact of corporate taxes on negotiated wages. While increases in the corporate tax rate reduce domestic wages, they raise the wage level of foreign workers. In a tax competition game, the endogeneous wage level gives rise to a positive fiscal externality that enforces the race-to-the-bottom in corporate tax rates.

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