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Taxation of Firms with Unknown Mobility

25 Pages Posted: 5 Dec 2012  

Johannes Becker

University of Cologne

Andrea Schneider

University of Muenster - Institute for Public Economics

Date Written: November 30, 2012

Abstract

We analyze the optimal tax choices of a revenue-maximizing government that levies taxes from firms of which the true degree of mobility is ex ante unknown. Differential tax treatment of immobile and mobile firms is ruled out, but the government may learn from the firms’ location responses to past tax rate changes. Firms, however, may anticipate this and adjust their choices accordingly. We derive all symmetric Bayesian equilibria with a focus on the (so far neglected) one where the government sets a tax rate that triggers partial migration but full revelation of the true number of mobile firms. We show that, if tax competition is fierce (i.e., relocation cost and foreign tax rates are low), expected tax rates and expected firm migration are higher if the degree of mobility is unknown. There is a positive value of learning, i.e. commitment on future tax rates cannot increase the government’s expected revenue. However, if the government can commit to a rule-based learning mechanism, i.e. credibly tie its future tax policy to present policy outcomes, it may obtain a Pareto improvement.

Keywords: corporate taxation, firm mobility, incomplete information

JEL Classification: H250, H320, H870

Suggested Citation

Becker, Johannes and Schneider, Andrea, Taxation of Firms with Unknown Mobility (November 30, 2012). CESifo Working Paper Series No. 4012. Available at SSRN: https://ssrn.com/abstract=2184725

Johannes Becker (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Andrea Schneider

University of Muenster - Institute for Public Economics ( email )

Wilmergasse 6 – 8
Münster, 48143
Germany

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