Cash-flow taxes in an international setting

Journal article

This paper models the effects of cash-flow taxes on company profit which differ according to the location of the tax. The model incorporates a multinational producing and selling in two countries with three sources of economic 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, national governments face 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.

Authors: Auerbach, A; Devereux, MP

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: American Economic Association
• Journal: American Economic Journal: Economic Policy
• Volume: 10
• Issue: 3
• Pages: 69-94
• Publication date: 2018-07-26
• Acceptance date: 2017-11-20
• EISSN: 1945-774X
• ISSN: 1945-7731
• Keywords: transfer pricing; profit-shifting; destination-based taxation