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Cash-Flow Taxes in an International Setting

  • Alan J. Auerbach
  • Michael P. Devereux
American Economic Journal: Economic Policy
vol. 10, no. 3, August 2018
(pp. 69-94)
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Abstract

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 nonresident. By contrast, a destination-based cash-flow tax does not distort behavior, but falls only on domestic residents.

Citation

Auerbach, Alan J., and Michael P. Devereux. 2018. "Cash-Flow Taxes in an International Setting." American Economic Journal: Economic Policy, 10 (3): 69-94. DOI: 10.1257/pol.20170108

Additional Materials

JEL Classification

  • F23 Multinational Firms; International Business
  • H25 Business Taxes and Subsidies including sales and value-added (VAT)
  • H87 International Fiscal Issues; International Public Goods
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