Corporate Taxation and Multinational Activity



Table 1: The impact of corporate taxation on foreign affiliate production®

small

Affiliate production in

large

country j if country i is:

identical

skilled labor
abundant

EX

C

DED

EX

C

DED

EX

C

DED

EX

C

DED

Affiliate production

1.65%

1.65%

O6

14.89%

14.89%

8.07%

25.00%

25.00%

25.00%

45.26%

45.26%

45.94%

∆ti

+

+/-c

0 (-)

+

+/-c

-

+

+/-e

-

+

+

+

∆t7

-

-/+d

0 (-)

-

-/+d

-

-

-/ + ʃ

+a

-

-

-

ʌp

-

-

0 (-)

-

-

-

-

-

-

-

-

-

∆<5i

+

+

0 (+)

+

+

+

+

+

+

-

-

-

δ¾'

-

-

0 (-)

-

-

-

-

-

-

+

+

+

Notes:      The assumptions about factor endowments in country i are as following: small: Li/(L¾ H- L7-) = Si∕(Si + Sj) = 0.15. large: Li∕(Li ⅛ Lj) = Si∕(Si ⅛ <S7-) = 0.85.

identical: Li/(Li + L7) = Si/(Si + Sj) = 0.5. skilled labor abundant: Li/(Li + L7) = 0.15, Si∕(Si + Sj) = 0.85.

∆t¾ (A,tj) indicates an increase of the corporate tax rate in country i (country j).

Λ,tJ' indicates an increase of the withholding tax in country j.

Δ<5⅛ (Δ<57) indicates an increase in the depreciation allowances in country i (country j).

a Affiliate production is measured in percent of the total production of the X-good.

b To evaluate the impact of a change in tax parameter, the tax rates are set at L = tj = 0.05, which leads to affiliate production of 7.86% initially.

c Positive, if country i is in excess credit position, i.e. if L < (tj --1↑∕ (1 — tj)) holds, otherwise negative.

d Negative, if country i is not in excess credit position, i.e. if tj < (t¾ — tj (1 — tj)) holds, otherwise positive.

e Positive, if both countries are in excess credit position, i.e. within the range (tj — fP(l — ti)) < ti < (tj T tP(l — tj)), otherwise negative.

ʃ Negative, if both countries are in excess credit position, i.e. within the range (ti — tj (1 — t7)) < t7- < (ti H- tj (1 — tj), otherwise positive.

9 Positive, for a reasonably large tax increase, otherwise negative.



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