Asymmetric Capital Tax Competition with Profit Shifting

This paper analyses capital tax competition between jurisdictions
of different size when multinational firms can shift some fraction
of their tax base between them. For the case of revenue maximizing
governments, we show that introducing profit shifting will not
generally increase downward pressure on tax rates. We find that
profit shifting decreases the tax-base elasticity of the low tax
jurisdiction while increasing the elasticity of the high tax
jurisdiction. Therefore, by the direct (impact) effect, tax rates
will converge as a result of additional profit shifting
opportunities. In general equilibrium, however, tax rates may
decrease or increase in both jurisdictions.