Tax Competition and Employment
71 Pages Posted: 23 Nov 2019 Last revised: 8 Sep 2020
Date Written: December 12, 2019
We study the effect of exposure to tax competition on employment. We find that changes in foreign tax rates relative to domestic tax rates oppositely affect the employment of domestic firms exposed to competition from foreign firms. We attribute these effects to lower foreign tax rates increasing the cash flow and investment of foreign firms that import into a given domestic country, and of foreign firms with domestic subsidiaries that compete in a given domestic country. The adverse effect of exposure to tax competition on employment is greater for domestic firms whose employment is more sensitive to competition: firms located in countries with fewer labor protections, non-service firms, and firms with fewer intangible assets. The effect is also greater for standalone firms and non-multinational firms which lack the international tax planning opportunities and the geographic diversification to weather tax competition.
Keywords: Tax competition, Competition, Employment, Real effects, Trade
JEL Classification: E24, F14, F16, H23, H35
Suggested Citation: Suggested Citation