Lifestyle Taxes in the Presence of Profit Shifting
15 Pages Posted: 10 Mar 2020
Date Written: 2020
Non-communicable diseases (NCDs) cause about 71% of all deaths globally and a considerable increase in health care costs. To tackle this problem, several Governments have designed "sin taxes", i.e, extra payments related to the quantity of unhealthy contents of specific goods. However, unhealthy food and soda drinks are often produced by multinational companies for which also profit shifting is a serious issue. The international dimension of these markets may have a dramatic impact on the actual implementation of sin taxes. This article contributes to the literature by analysing the effectiveness of sin taxes levied on a good produced by a multinational company. Our analysis shows that a trade off between profit shifting and lifestyle taxes may exist. In general, the First Best sin tax cannot be levied if Governments are also interested in corporate tax revenue. This is a quite interesting policy issue: countries that today benefit from profit shifting may find it harder to impose significant lifestyle taxes. We also provide some insights about the effects that the international effort to fight profit shifting may have on lifestyle taxes.
Keywords: optimal lifestyle tax, multinational industry, profit shifting, health care costs, tax competition
JEL Classification: H210, H320, D110, D620, I180
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