Wages and International Tax Competition

41 Pages Posted: 6 Jul 2012

See all articles by Sebastian Krautheim

Sebastian Krautheim

University of Passau

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: June 29, 2012

Abstract

Rent-sharing between firm owners and workers is a robust empirical finding. If workers bargain with firms, information on the actual surplus is essential. When the firm can use profit shifting to create private information on the surplus, it can thereby reduce its wage bill. We study how rent sharing and this wage incentive for profit shifting affect the ability of governments to tax multinational companies in a standard model of international tax competition. We find that if firms only have a tax incentive for profit shifting, rent-sharing decreases the competitive pressure on the large country and leads to higher equilibrium tax rates. When we allow for the wage channel, this result can change. If the wage incentive is sufficiently strong, rent-sharing increases the competitive pressure on the large country, implying a lower equilibrium tax rate.

Keywords: wages, tax competition, rent-sharing, profit shifting, tax havens, private information

JEL Classification: F230, H250, H730

Suggested Citation

Krautheim, Sebastian and Schmidt-Eisenlohr, Tim, Wages and International Tax Competition (June 29, 2012). CESifo Working Paper Series No. 3867, Available at SSRN: https://ssrn.com/abstract=2100772 or http://dx.doi.org/10.2139/ssrn.2100772

Sebastian Krautheim

University of Passau ( email )

Faculty of Economics and Business Administration
Dr. Hans-Kapfinger-Straße 14b
Passau, 94032
Germany

HOME PAGE: http://sites.google.com/site/krautheimecon/

Tim Schmidt-Eisenlohr (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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