Abstract: The multinationalization of corporate investment in recent years has
given rise to a number of international tax avoidance schemes that
may be eroding tax revenues in industrialized countries, but which
may also reduce tax burdens on mobile capital and so facilitate
investment. Both the welfare effects of and the optimal response to
international tax planning are therefore ambiguous. Evaluating
these factors in a simple general equilibrium model, we find that
citizens of high-tax countries benefit from (some) tax planning.
Paradoxically, if tax rates are not too high, an increase in tax
planning activity causes a rise in optimal corporate tax rates, and
a decline in multinational investment. Thus fears of a ``race to
the bottom\\'\\' in corporate tax rates may be
misplaced.
Keywords: income shifting, tax planning, foreign direct investment, tax competition, thin capitalization
JEL Classification: H2;H7