Consumption and Cash-Flow Taxes in an International Setting
We model the effects of consumption-type taxes which differ according to the base and location of the tax. Our model incorporates a multinational producing and selling in two countries with three sources of rent, each in a different location: a fixed basic production factor (located with initial production), mobile managerial skill, and a fixed final production factor (located with consumption). In the general case, we show that for national governments, there are trade-offs in choosing between alternative taxes. In particular, a cash-flow tax on a source basis creates welfare-impairing distortions to production and consumption, but is partially incident on the owners of domestic production who may be non-resident. By contrast, a destination-based cash-flow tax does not distort behavior, but is incident only on domestic residents. In the alternative case with the returns to the fixed factors accruing to domestic residents, the only distortion from the source-based tax is through the allocation of the mobile managerial skill. In this case, the source-based tax is also incident only on domestic residents, and is dominated by an equivalent tax on a destination basis.
We would like to thank Steve Bond and seminar participants at the Centre for Business Taxation, the Oxford University Economics department, the IFS-STICERD public economics seminar, and Goethe University for helpful discussion and comments. Devereux acknowledges the financial support of the ESRC under grant RES-060-25-0033. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Michael P. Devereux
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