Corporate Taxation and Multinational Activity

(Alworth, 1988, provides a detailed discussion).⁷

All production factors are owned by the households, so that consumer in-
come is determined by the sum of factor rewards in country i (wSiSi + wLiLi)
plus the eventual transfers of tax revenues to them. Below, we discuss two
modes of public spending of tax revenues, where only one of them involves such
transfers.

3.3 Public sector

The only source of tax revenues are taxes on operating profits of firms. Hence,
tax revenues for country i can be summarized as

Gi = ni [(xn + Xnj) σ^ti - Dni

⁺ hi [ Xiii σ ^ti ⁺ Xihjj σ (1 ^{- t}j ^{)( t}M ^{- t}w ) ^- Dii i

+ Vi [(Xj + Xj) σ (1 - tj )(tM - tw) - DVii

+hj [xhii σ (ti - titw+tw ) - Bhi

+ Vj [(Xjii + Xjij¢ ^Pj(ti - titw + tw) - Djii .          (17)

Tax revenues are either used to finance a lump-sum transfer to consumers or
to provide public infrastructure to the firms to lower their fixed input require-
ments (see Kellenberg, 2003, for a treatment of infrastructure in a model with
MNEs). In case of lump-sum transfers, the gross national income of country i
Ei ) includes the tax revenues collected by its government. In case of public
infrastructure provision, no such transfers occur and the gross national income
equals total factor income in i. We assume that one unit of public infrastructure
needs one unit of skilled labor and one unit of unskilled labor.⁸ Accordingly,
public infrastructure (Ii) in country i equals

⁷See Bond and Samuleson (1989), Janeba (1995), and Davies (2003) for a theoretical analy-
sis on the effects of the methods of double taxation relief on the volume of foreign investment.
Davies (2004) provides a survey.

⁸ This guarantees that the production of public infrastructure as such only induces minor
effects on relative factor prices of skilled and unskilled labor.

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