| Abstract: |
Many multinational firms (MNEs) pay low or no corporation tax in high-tax
countries because they shift taxable income to tax havens. We incorporate
nonconvex costs of profit shifting and unobserved heterogeneity in
profit-shifting ability in the MNEs' value maximization problem to study
responses of firms to tax policies. We estimate our model using UK corporate
tax returns data and quantify: (i) the elasticities of tax base and capital
stock with respect to tax rates, (ii) the fixed and variable components of
profit-shifting costs for different firm types, and (iii) the government's
trade-off between raising tax revenue by reducing profit shifting and
attracting investment. Accounting for extensive margin profit-reporting
decisions, we reconcile most of the discrepancies between previous micro- and
macro-level estimates of tax base elasticities. We test the predictions of the
model using a quasi-natural experiment that restricted profit-shifting by
Italian MNEs that operated in the UK and evaluate two types of tax policies
that can be analyzed using our approach. |