XML

Seoul Journal of Economics - Vol. 23 , No. 3

[ Article ]
Seoul Journal of Economics - Vol. 23, No. 3, pp. 365-389
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2010
Received 13 Sep 2008 Revised 04 Jun 2009 Accepted 05 Jun 2009

Profit Taxation, Monopolistic Competition and International Relocation of Firms
Wataru Johdo
Associate Professor, Faculty of Economics, Tezukayama University, 7-1-1, Tezukayama, Nara 631-8501, Japan, Fax: +81-742-46-4994 (johdo@tezukayama-u.ac.jp)

Funding Information ▼

JEL Classification: F2, H2


Abstract

This paper presents a two-country monopolistic competition trade model to analyze how the profit taxation determines the location of firms and national welfare. Profit tax cuts may increase or decrease the number of firms in a country, depending on the elasticities of substitution between domestic and foreign goods and between goods produced in the same country. Accordingly, profit tax cuts may increase or decrease domestic consumption and welfare, depending on these elasticities. The paper provides parameter conditions under which a decrease in the domestic profit tax attracts foreign firms and increases domestic welfare.


Keywords: Profit tax, Location, Monopolistic competition, Two country model

Acknowledgments

Substantial improvements in this paper were made possible by helpful comments and constructive suggestions from two anonymous referees. Financial support by Tezukayama University is gratefully acknowleged.


References
1. Baldwin, R. E., and Krugman, P. “Agglomeration, Integration and Tax Harmonization.” European Economic Review 48 (No. 1 2004): 1-23.
2. Borck, R., and Pflüger, M. “Agglomeration and Tax Competition.” European Economic Review 50 (No. 3 2006): 647-68.
3. Fuest, C., and Huber, B. “Why Capital Income Taxes Survive in Open Economies: The Role of Multinational Firms.” International Tax and Public Finance 9 (No. 5 2002): 567-89.
4. Haufler, A. “Prospects for Co-ordination of Corporate Taxation and the Taxation of Interest Income in the EU.” Fiscal Studies 20 (No. 2 1999): 133-53.
5. Haufler, A., and Wooton, I. “Country Size and Tax Competition for Foreign Direct Investment.” Journal of Public Economics 71 (No. 1 1999): 121-39.
6. Haufler, A., and Pflüger, M. “International Commodity Taxation under Monopolistic Competition.” Journal of Public Economic Theory 6 (No. 3 2004): 445-70.
7. Haufler, A., and Schjelderup, G. “Corporate Tax Systems and Cross Country Profit Shifting.” Oxford Economic Papers 52 (No. 2 2000): 306-25.
8. Hosoe, M., and Sugeta, H. “Industrial Structure, Trade, and Foreign Direct Investment.” Seoul Journal of Economics 8 (No. 2 1995): 165-93.
9. Huizinga, H., and Nielsen, S. B. “Capital Income and Profit Taxation with Foreign Ownership of Firms.” Journal of International Economics 42 (Nos. 1-2 1997): 149-65.
10. Huizinga, H., and Nielsen, S. B. “The Coordination of Capital Income and Profit Taxation with Cross-ownership of Firms.” Regional Science and Urban Economics 32 (No. 1 2002): 1-26.
11. Janeba, E. “Corporate Income Tax Competition, Double Taxation Treaties, and Foreign Direct Investment.” Journal of Public Economics 56 (No. 2 1995): 311-25.
12. Johdo, W., and Hashimoto, K. “International Relocation, the Real Exchange Rate and Welfare.” Journal of Economic Dynamics and Control 29 (No. 8 2005): 1449-69.
13. Kind, H. J., Midelfart, K. H., and Schjelderup, G. “Competing for Capital in a ‘Lumpy’ World.” Journal of Public Economics 78 (No. 3 2000): 253-74.
14. Kind, H. J., Midelfart, K. H., and Schjelderup, G. “Corporate Tax Systems, Multinational Enterprises, and Economic Integration.” Journal of International Economics 65 (No. 2 2005): 507-21.
15. Konan, D. E. “Strategic Taxation of the Multinational Enterprise: A New Argument for Double Taxation.” Journal of Public Economics 63 (No. 2 1997): 301-9.
16. Krugman, P. “Increasing Returns and Economic Geography.” Journal of Political Economy 99 (No. 2 1991): 483-99.
17. Krugman, P., and Venables, A. “Globalization and the Inequality of Nations.” Quarterly Journal of Economics 66 (No. 4 1995): 857-80.
18. Martin, P., and Rogers, C. A. “Industrial Location and Public Infrastructure.” Journal of International Economics 39 (Nos. 3-4 1995): 335-51.
19. Melitz, J. M. “The Impact of Trade on Intra-industry Reallocations and Aggregate Industry Productivity.” Econometrica 71 (No. 6 2003): 1695-725.
20. Obstfeld, M., and Rogoff, K. “The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?” NBER Macroeconomics Annual 15 (2000): 339-90.
21. Pflüger, M. “Ecological Dumping under Monopolistic Competition.” Scandinavian Journal of Economics 103 (No. 4 2001): 689-706.
22. Pflüger, M. “Economic Integration, Wage Policies, and Social Policies.” Oxford Economic Papers 56 (No. 1 2004): 135-50.
23. Rhee, G. “Taxation on Fixed Foreign Direct Investment and International Commodity Trade as a Potential Protector.” Seoul Journal of Economics 11 (No. 2 1998): 223-41.
24. Ricci, L. A. “Economic Geography and Comparative Advantage: Agglomeration versus Specialization.” European Economic Review 43 (No. 2 1999): 357-77.
25. Tille, C. “The Role of Consumption Substitutability in the International Transmission of Monetary Shocks.” Journal of International Economics 53 (No. 2 2001): 421-44.
26. Wang, Y. “Service Multinationals in the Theory of International Trade.” Seoul Journal of Economics 7 (No. 1 1994): 35-51.
27. Wilson, J. “Theories of Tax Competition.” National Tax Journal 52 (No. 2 1999): 269-304.