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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 23, No. 3, pp.365-389
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

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.

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