TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, August 14, 2018

Auerbach & Devereux: Cash Flow Taxes In An International Setting

Alan J. Auerbach (UC-Berkeley) & Michael P. Devereux (Oxford), Cash Flow Taxes in an International Setting, 10 Am. Econ. J. 69 (Aug. 2018):

We model the effects of cash-flow taxes, differing according to the location of the tax, on the behavior of a multinational producing and selling in two countries with three sources of economic rent: a fixed basic-production factor (located with initial production), mobile managerial skill, and a fixed final production factor (located with consumption). In general, governments face trade-offs in choosing between alternative taxes.

A source-based cash-flow tax creates welfare-impairing production and consumption distortions, but falls partially on firm owners who may be nonresident. By contrast, a destination-based cash-flow tax does not distort behavior, but falls only on domestic residents.

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