TY  - JOUR
AU  - Gordon,Roger H.
AU  - MacKie-Mason,Jeffrey K.
TI  - Why Is There Corporate Taxation In a Small Open Economy? The Role of Transfer Pricing and Income Shifting
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4690
PY  - 1994
Y2  - March 1994
UR  - http://www.nber.org/papers/w4690
L1  - http://www.nber.org/papers/w4690.pdf
N1  - Author contact info:
Roger H. Gordon
Department of Economics 0508
University of California, San Diego
9500 Gilman Drive, Dept. 0508
La Jolla, CA 92093
Tel: 858/534-4828
Fax: 858/534-7040
E-Mail: rogordon@ucsd.edu

Jeffrey K. MacKie-Mason
Department of Economics
462 Lorch Hall
Ann Arbor, MI  48109-1220
Tel: 47/228-55127 or 47/2285-5035 fax
E-Mail: jmm@umich.edu
M1  - published as Jason Cummins, Trevor Harris, Kevin Hassett. "Accounting Standards, Information Flow, and Firm Investment Behavior," in Martin Feldstein, James R. Hines Jr., R. Glenn Hubbard, "The Effects of Taxation on Multinational Corporations" University of Chicago Press (1995)

AB  - Several recent papers argue that corporate income taxes should not be used by small, open economies.  With capital mobility, the burden of the tax falls on fixed factors (e.g., labor), and the tax system is more efficient if labor is taxed directly.  However, corporate taxes not only exist but rates are roughly comparable with the top personal tax rates.  Past models also forecast that multinationals should not invest in countries with low corporate tax rates, since the surtax they owe when profits are repatriated puts them at a competitive disadvantage.  Yet such foreign direct investment is substantial.  We suggest that the resolution of these puzzles may be found in the role of income shifting, both domestic (between the personal and corporate tax bases) and cross-border (through transfer pricing).  Countries need cash-flow corporate taxes as a backstop to labor taxes to discourage individuals from converting their labor income into otherwise untaxed corporate income.  We explore how these taxes can best be modified to deal as well with cross-border shifting.
ER  -