Optimal Tax Policy when Firms are Internationally Mobile

Let A¹ denote the vector of firm specific profitabilities for which π(Λ',B) =0,
for a given B. In addition, firms can decide to change the production location and
go abroad. In this case, firms have to bear the migration cost C which is equal
across firms. Without loss of generality, we normalize location-specific profitability
abroad to zero. Suppose that the foreign government sets its tax rate to t and the
rate of depreciation allowances to β. The firm stays in the home country if

π («, a) ≥ π* (t, β) — C                           (12)

where the asterisk denotes the foreign country and. A^h denotes the vector of
firm specific profitabilities which satisfy π = π* — C.

3.2 Households

Domestic households own all firms in the economy. Profits are their only source
of income. Household consumption is therefore:

ZB⁺ ∕∙A^h               ∕∙B⁺ pA⁺

j   [π] dAdB + J   J

with

π = F (K,A,B)(1 — u) — (1 — au) K               (14)

π* = F (K *,A,B )(1 — t) — (1 — βt) K *              (15)

3.3 Government

The government uses profit tax revenue to finance the public good g. The budget
constraint of the government is given by

The government is supposed to maximize the social welfare function W :

W = U (c) + H (g)

<<   8   9   10   11   12   13   14   >>

More intriguing information