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The effects of trade liberalization on tax avoidance

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  • Rui Pan
  • Dao‐Zhi Zeng

Abstract

Does trade liberalization aggravate tax avoidance? We build a three‐country model of tax competition consisting of two nonhaven countries and one tax haven in which goods are traded between the nonhavens and firms may shift profits to the tax haven. When the nonhavens cooperate, the reduction in trade costs does not change the degree of tax avoidance. In contrast, when the nonhavens do not cooperate, the equilibrium tax rates become higher, resulting in more tax avoidance. Furthermore, trade liberalization strengthens the tax competition between nonhavens, which further increases the tax‐avoidance activities.

Suggested Citation

  • Rui Pan & Dao‐Zhi Zeng, 2023. "The effects of trade liberalization on tax avoidance," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(4), pages 898-932, December.
  • Handle: RePEc:bla:ijethy:v:19:y:2023:i:4:p:898-932
    DOI: 10.1111/ijet.12384
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