Why corporate taxes may rise : the case of economic integration

Abstract

Almost all the literature on tax competition in the presence of multinationals (MNCs) ignores the combined effect of profit shifting and economic integration (i.e., a reduction in trade costs) on equilibrium capital taxes. In this paper we set up a two-country model with trade costs to analyze the relationship between economic integration and equilibrium taxes. We find that economic integration leads to higher equilibrium tax rates for sufficiently low levels of trade costs if multinationals are owned by home country residents.