Fiscal competition and offshoring

Fuest, Clemens and Becker, Johannes (2008) Fiscal competition and offshoring. In: Annual Symposium 2008.

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This paper analyses fiscal competition between two countries in a model where firms operating in imperfectly competitive markets may offshore their production to a low-cost third country. We show that this kind of cost-induced offshoring may have two externalities on the other country's welfare. Firstly, consumer surplus increases due to lower prices, and secondly, profits and thus profit tax revenue decrease in response to lower prices. We demonstrate that the latter effect may dominate the former. This implies that offshoring may have a negative externality. Since higher taxes in high cost countries increase offshoring, tax competition may lead to inefficiently high tax rates. High cost countries may benefit from a coordinated reduction of their corporate taxes.

Item Type: Conference or Workshop Item (Speech)
Keywords: Corporate Tax Competition, Offshoring
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 04 May 2012 14:17
Last Modified: 23 Oct 2015 14:07

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