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Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity

B.E. Journal of Economic Analysis and Policy (Contributions), Forthcoming

26 Pages Posted: 12 May 2015  

Dominika Langenmayr

Catholic University of Eichstaett-Ingolstadt; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 26, 2015

Abstract

This paper analyzes measures that limit firms’ profit shifting activities in a model that incorporates heterogeneous firm productivity and monopolistic competition. Such measures, e.g. thin capitalization rules, have become increasingly widespread as governments have reacted to growing profit shifting activities of multinational companies. However, besides limiting profit shifting, such rules entail costs. As the regulations can only focus on the means to shift profits, not on profit shifting itself, they impose costs on all firms, no matter whether these firms shift profits abroad or not. In the model, these costs force some firms to exit the market. Thus, as the resulting lower competition makes the remaining firms more profitable, regulations to limit profit shifting may even increase the aggregate amount of profits shifted abroad. From a welfare point of view, it can be optimal not to limit profit shifting by such rules.

Keywords: profit shifting, heterogeneous firms, tax competition

JEL Classification: H25, F23, H73

Suggested Citation

Langenmayr, Dominika, Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity (March 26, 2015). B.E. Journal of Economic Analysis and Policy (Contributions), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2604886

Dominika Irma Langenmayr (Contact Author)

Catholic University of Eichstaett-Ingolstadt ( email )

Auf der Schanz 49
Ingolstadt, D-85049
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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