An Economic Analysis of Extraterritorial Taxation
Abstract:
This paper proposes an economic analysis of extraterritorial tax policy. We consider a country imposing top-up taxes to the foreign profits of multinational firms to ensu re a minimum effective corporate tax rate. We analyze the incidence of this tax, its domestic and global welfare effects, and derive conditions for op timal unilateral policy in a flexible multinational monopoly model. We obta in four main results. First, extraterritorial taxation generates additional tax revenues but leads to domestic price increases. When foreign profits a re not taxed, the tax revenue gains dominate consumer welfare losses even f or small countries. Second, when the foreign tax rate is positive, welfare effects are ambiguous. The optimal extraterritorial rate rises with domesti c market shares and falls with foreign tax rates. A large enough country (o r coalition of countries) can top-up foreign taxes, but a small country alo ne cannot overtax firms that are already heavily taxed abroad. Third, taxin g the undertaxed profits of foreign multinationals has generally better wel fare effects than tariffs. Last, revenue gains from extraterritorial profit taxation increase quadratically with country size. Extraterritorial tax co llection turns the logic of tax competition on its head: large destination market countries (for which revenue gains typically swamp price increases) have incentives to tax the undertaxed profits of multinational firms, which can lead to a race-to-the-top with corporate income tax rates.
DTSTAMP:20260615T083055Z DTSTART:20240506T143000Z DTEND:20240506T160000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR