Cash-Flow Taxes in an International Setting
Alan J. Auerbach
Michael P. Devereux
- American Economic Journal: Economic Policy (Forthcoming)
We model the effects of cash-flow taxes, differing according to the location of the tax, on the behavior of a multinational producing and selling in two countries with three sources of economic rent: a fixed basic production factor (located with initial production), mobile managerial skill, and a fixed final production factor (located with consumption). In general, governments face trade-offs in choosing between alternative taxes. A source-based cash-flow tax creates welfare-impairing production and consumption distortions, but falls partially on firm owners who may be non-resident. By contrast, a destination-based cash-flow tax does not distort behavior, but falls only on domestic residents.
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