Why the European Union Should Adopt Formula Apportionment with a Sales Factor

23 Pages Posted: 17 Sep 2008

See all articles by Thomas Eichner

Thomas Eichner

University of Siegen - School of Economic Disciplines

Marco Runkel

University of Munich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2008-01

Abstract

Using a two-country tax competition model with a multinational enterprise (MNE), this paper addresses the question of whether the European Union should replace separate accounting (SA) in corporate income taxation by formula apportionment (FA) and, if so, which apportionment factors should be used. Our main result is that FA with a sales factor may mitigate or even eliminate fiscal externalities caused by the countries' tax policy. Hence, our analysis provides a microfoundation for the sales apportionment factor. In an empirical calibration to the EU-15 we show that the transition from SA to FA with a sales-only formula raises average tax rates by 2% and average tax revenues by 1 billion euros or 0.1% of GDP. These effects result in an increase of welfare.

Suggested Citation

Eichner, Thomas and Runkel, Marco, Why the European Union Should Adopt Formula Apportionment with a Sales Factor (2008-01). Scandinavian Journal of Economics, Vol. 110, Issue 3, pp. 567-589, September 2008. Available at SSRN: https://ssrn.com/abstract=1269706 or http://dx.doi.org/10.1111/j.1467-9442.2008.00551.x

Thomas Eichner (Contact Author)

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

Marco Runkel

University of Munich - Department of Economics ( email )

Schackstr. 4
Munich, 80539
Germany
++49 (0) 89 2180 6339 (Phone)
++49 (0) 89 2180 3128 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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