Corporate Income Taxation of Multinationals in a General Equilibrium Model

Using a general multi-country equilibrium model with a multinational enterprise, this paper investigates the efficiency properties of separate accounting and formula apportionment. If governments are large, i.e. take into account the effect of their statutory tax rate on the interest rate, and maximize tax revenues, tax rates under separate accounting may be inefficiently high while tax rates under formula apportionment turn out to be inefficiently low. In case of separate accounting the tendency toward inefficiently high tax rates traces back to a negative tax base externality. In case of formula apportionment the race to the bottom is caused by positive formula and tax base externalities. This is in contrast to previous studies ignoring interest rate effects and arguing that under separate accounting there is a race to the bottom and that under formula apportionment there is a tendency toward inefficiently high tax rates due to a negative tax base externality. JEL classification: H7, H73 key words: separate accounting, formula apportionment, apportionment shares Eichner: Department of Economics, University of Bielefeld, Universitätsstr. 25, 33615 Bielefeld, Germany, phone: ++ 49 (0) 521 106 4857, email: [email protected]; Runkel: Department of Economics, University of Munich, Ludwigstr. 28/Vgb./III, 80539 Munich, Germany, phone: ++ 49 (0) 89 2180 6339, email: [email protected]