Tax competition in the presence of profit shifting q

The popular view is that governments should crack down on tax avoidance by multinational corpora-tions, but in practice, lax anti-profit-shifting policies are common. Here, we analyze how controlling profit shifting influences fiscal competition. Equilibrium tax rates are determined by the elasticities of two components: retained profit and capital mobility. Anti-profit-shifting policies decrease the elasticity of the first, but increase the elasticity of the second. The impact of these policies on equilibrium tax rates is then ambiguous. We show that there are cases in which laxer policies increase equilibrium tax rates and countries' well-being by favoring investments. We use estimates of different elasticities to show that our model can support lax enforcement.(C) 2023 Elsevier B.V. All rights reserved.