Do Countries Compensate Firms for International Wage Differentials?

Mittermaier F, Rincke J (2013)


Publication Language: English

Publication Type: Journal article

Publication year: 2013

Journal

Publisher: Elsevier

Book Volume: 102

Pages Range: 23-36

DOI: 10.1016/j.jpubeco.2013.03.003

Abstract

We address the role of labor cost differentials for national tax policies. Modeling a tax competition race between two countries competing for a population of mobile firms, we show that in equilibrium, the high-wage country charges a lower tax than the low-wage country. Moreover, under tax competition the high-wage country attracts more firms than in a setting without taxation. Exploiting exogenous variation in labor cost differentials induced by the breakdown of communism in eastern Europe, we find that tax policies are in line with the model prediction. Our most conservative estimates suggest that a one dollar increase in the compensation cost differential (in prices as of 2000) triggers a cut of the statutory corporate income tax rate by about one percentage point.

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APA:

Mittermaier, F., & Rincke, J. (2013). Do Countries Compensate Firms for International Wage Differentials? Journal of Public Economics, 102, 23-36. https://dx.doi.org/10.1016/j.jpubeco.2013.03.003

MLA:

Mittermaier, Ferdinand, and Johannes Rincke. "Do Countries Compensate Firms for International Wage Differentials?" Journal of Public Economics 102 (2013): 23-36.

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