Fiscal Externalities In The Globally Integrated Market

Abstract

While tax competition of mobile capital has been explored in the literature, little attention has been paid to the effects on business incentives for global trading. We show that tax competition creates negative fiscal externalities via distorted production decisions of multinational companies, when the markets across countries are interrelated through intra-firm trade. Pareto improvement may emerge once the governance of the interrelated markets is coordinated across different governments.