Logo Logo
Switch Language to German

Haufler, Andreas and Stähler, Frank (23. November 2009): Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit taxes. Discussion Papers in Economics 2009-19 [PDF, 300kB]

There is a more recent version of this item available.


An important puzzle in corporate taxation is that effective tax rates have fallen significantly while tax revenue has simultaneously risen in most countries. Moreover, the gross profitability of firms seems to be lower in high-tax countries, even though standard models of international investment would yield the opposite conclusion. We offer an explanation for these stylized facts by setting up a simple two-country model of tax competition with heterogenous firms. In this model a unique, asymmetric Nash equilibrium can be shown to exist, provided that countries are sufficiently different with respect to their exogenous market conditions. In equilibrium the larger country levies the higher tax rate and attracts the high-cost firms. A simultaneous expansion of both markets intensifies tax competition and causes both countries to reduce their tax rates, despite higher corporate tax bases.

Available Versions of this Item

Actions (login required)

View Item View Item