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Session Overview
G06: Tax Theory
Thursday, 19/Aug/2021:
4:00pm - 5:30pm

Session Chair: Thomas A. Gresik, University of Notre Dame
Discussant Paper 1: Simon Naitram, University of the West Indies
Discussant Paper 2: Eric Bond, Vanderbilt University
Discussant Paper 3: Mohammed Mardan, Norwegian School of Economics (NHH)
Discussant Paper 4: Shafik Hebous, IMF

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4:00pm - 4:22pm

What is the Optimal Minimum Tax?

Shafik Hebous1, Michael Keen2

1IMF, United States of America; 2IMF, United States of America

What is the optimal level of a minimum tax in a multi-country world? We extend two seminal models of tax competition—Zodrow and Mieszkowski (1986) and Kanbur and Keen (1993)—to study two notions of an optimal minimum tax: i) the Pareto level in a Nash tax competition; and ii) the revenue maximizing level. We show that under general conditions, the efficient minimum tax rate is above the lower of the Nash taxes. Under specific functional forms, we express the optimal minimum tax rate as a function of the Nash tax rate.

4:22pm - 4:45pm

The Corporate Income Tax is Inherently Benefit-Based

Simon Naitram1, Matthew Weinzierl2,3

1University of the West Indies; 2Harvard Business School; 3NBER

In this paper we examine the benefit characteristics of the corporate income tax. We examine the extent to which the incidence of the corporate tax burden aligns with the incidence of the public input benefits. Our paper uncovers a simple result: the mechanisms that determine the incidence of the corporate income tax are the same mechanisms that determine who benefits from the public input. This result implies that the corporate tax is inherently benefit-based. In cases where the benefits of the public input do not exactly offset the burden of the corporate tax, we characterise the net incidence of a combined increase in the public input funded by an increase in the corporate tax.

Naitram-The Corporate Income Tax is Inherently Benefit-Based-345.pdf

4:45pm - 5:07pm

Can Destination-Based Cash Flow Taxes Arise in Equilibrium?

Eric Bond1, Thomas Gresik2

1Vanderbilt University, United States of America; 2Notre Dame, United States of America

We examine the effects of unilateral changes in a country's tax parameters in a two country model when both countries are part of a destination-based cash flow taxation (DBCFT) system. We consider deviations from a globally efficient DBCFT equilibrium by allowing each country to vary its corporate tax rate, degree of taxation of capital income, and level of border adjustment. We decompose the effect of policy changes into fiscal effects and price effects, and show that regardless of the similarity between the two countries, at least one country has an incentive to move toward taxation of capital income. If countries are identical, each has an incentive to move toward source-based taxation. In contrast, changes in corporate tax rates have neither fiscal or price effects, and thus can be set unilaterally. Our results shows the commitment mechanisms required to sustain multilateral DBCFT.

Bond-Can Destination-Based Cash Flow Taxes Arise in Equilibrium-115.pdf

5:07pm - 5:30pm

Playing Easy or Playing Hard To Get: When and How to Attract FDI

Thomas A. Gresik1, Dirk Schindler2, Guttorm Schjelderup3

1University of Notre Dame, United States of America; 2Erasmus School of Economics, The Netherlands; 3Norwegian School of Economics, Norway

We study the link between a country's institutional quality in tax collection and its optimal corporate tax policies in a model of heterogeneous multinationals that can shift income using both debt and transfer prices. Countries with weak institutional quality can be made worse off adopting policies that attract FDI as the benefits from higher wages and production are more than offset by tax base erosion. Countries with moderate institutional quality can gain from under-utilizing their ability to collect taxes, since the benefit of attracting more FDI outstrips the benefit of increased tax revenue. Countries with very strong institutions benefit from FDI and should utilize their full ability to collect taxes.

Gresik-Playing Easy or Playing Hard To Get-117.pdf

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