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Cash-Flow Taxes in an International Setting

Author

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  • Alan J. Auerbach
  • Michael P. Devereux

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.

Suggested Citation

  • Alan J. Auerbach & Michael P. Devereux, 2018. "Cash-Flow Taxes in an International Setting," American Economic Journal: Economic Policy, American Economic Association, vol. 10(3), pages 69-94, August.
    • Handle: RePEc:aea:aejpol:v:10:y:2018:i:3:p:69-94
    Note: DOI: 10.1257/pol.20170108
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    Citations

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    Cited by:

    1. Manon François, 2021. "Profit Shifting and Equilibrium Principles of International Taxation," PSE Working Papers halshs-03265056, HAL.
    2. David R. Agrawal, 2024. "Limits to Competition: Strategies for Promoting Jurisdictional Cooperation," NBER Chapters, in: Policy Responses to Tax Competition, National Bureau of Economic Research, Inc.
    3. Shafik Hebous & Andualem Mengistu, 2024. "Efficient Economic Rent Taxation under a Global Minimum Corporate Tax," CESifo Working Paper Series 11147, CESifo.
    4. Wolfram F. Richter, 2022. "Taxing Multinational Enterprises: A Theory-Based Approach to Reform," CESifo Working Paper Series 10119, CESifo.
    5. Eric W. Bond & Thomas A. Gresik, 2023. "On the incentive compatibility of universal adoption of destination-based cash flow taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1576-1600, December.
    6. Wolfram F. Richter, 2019. "Aligning profit taxation with value creation," CESifo Working Paper Series 7589, CESifo.
    7. Georg Schneider & Frank Stähler & Georg U. Thunecke, 2022. "The (Non-)Neutrality of Value-Added Taxation," CESifo Working Paper Series 9663, CESifo.
    8. Wolfram F. Richter, 2022. "Granting Market Countries the Right to Tax Profit without Physical Nexus," CESifo Working Paper Series 9556, CESifo.
    9. Julio López Laborda & Jorge Onrubia, 2019. "Los retos de la fiscalidad societaria en la era de la economía digital: el estado de la cuestión," Policy Papers 2019-04, FEDEA.
    10. Shafik Hebous & Alexander Klemm, 2020. "A destination-based allowance for corporate equity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 753-777, June.
    11. Robin Boadway & Motohiro Sato & Jean‐François Tremblay, 2021. "VAT and the taxation of rents," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(4), pages 601-621, August.
    12. Bond, Eric W. & Gresik, Thomas A., 2020. "Unilateral tax reform: Border adjusted taxes, cash flow taxes, and transfer pricing," Journal of Public Economics, Elsevier, vol. 184(C).
    13. Quint, Ansgar F. & Rudsinske, Jonas F., 2020. "International trade and tax-motivated transfer pricing," University of Göttingen Working Papers in Economics 406, University of Goettingen, Department of Economics.
    14. Wolfram F. Richter, 2019. "The Economics of the Digital Services Tax," CESifo Working Paper Series 7863, CESifo.
    15. Johannes Becker & Joachim Englisch, 2020. "Unilateral introduction of destination-based cash-flow taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 495-513, June.
    16. Jay Pil Choi & Jota Ishikawa & Hirofumi Okoshi, 2024. "Tax havens and cross-border licensing with transfer pricing regulation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(2), pages 333-366, April.
    17. Chen, Xuyang & Hindriks, Jean, 2023. "Multinational Taxation under Pressure: The Role of Tax Deductibility," LIDAM Discussion Papers CORE 2023013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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