How Should Income from Multinationals Be Taxed?
23 Pages Posted: 11 Jan 2017
Date Written: January 9, 2017
What do models of optimal taxation imply about how multinationals should be taxed? Rather than focusing on a variety of neutrality conditions that have been proposed in the literature, this paper goes back to first principles and considers the overall role of the corporate tax. In doing so, the paper starts in a closed economy setting, and argues that the tax is needed to compensate for the favorable tax treatment of corporate income under the personal income tax. The paper then explores an open economy setting. The forecasted tax structure differs dramatically from those seen in practice if the aim is to tax capital as well as labor income of domestic residents. However, the forecasts are remarkably close to actual policies if the aim is simply to impose a uniform tax on all forms of labor income, responding to the pressures arising from income shifting both across countries and between the personal and corporate tax bases.
Keywords: corporate taxation, taxation of multinationals
JEL Classification: H25, F23, G15
Suggested Citation: Suggested Citation