Abstract

The standard tax theory result that investment should not be distorted is based on the
assumption that profits are locally bound. In this paper we analyze the optimal tax policy
when firms are internationally mobile. We show that the optimal policy response to increasing
firm mobility may be taxation, subsidization or non-distortion of investment depending on
whether the mobile firms are more or less profitable than the average firm in the economy.
Our findings may contribute to understanding recent tax policy developments in many OECD
countries.

JEL Code: H25, H21.

Keywords: corporate taxes, optimal tax policy.

Johannes Becker
University of Cologne
Department of Public Finance
Albertus-Magnus-Platz
50923 Cologne
Germany
[email protected]

Clemens Fuest
University of Cologne
Department of Public Finance
Albertus-Magnus-Platz
50923 Cologne
Germany
[email protected]

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