Corporate income taxation of multinationals and unemployment

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.regsciurbeco.2009.04.001 Byline: Thomas Eichner (a), Marco Runkel (b) Keywords: Separate accounting; Formula apportionment; Unemployment Abstract: Within a two-country model with involuntary unemployment, this paper investigates corporate income taxation under separate accounting versus formula apportionment. In contrast to separate accounting, under formula apportionment the corporate tax policy causes a fiscal externality that results from unemployment. This externality is the highest when the apportionment formula contains the payroll factor only. It is minimized for the pure sales (property) formula, if the substitution elasticity is low (high). The unemployment externality tends to compensate other externalities such that tax rates become inefficiently low. The deviation from the efficient tax policy is minimized when the apportionment formula contains the sales factor only. Author Affiliation: (a) Department of Economics, University of Bielefeld, Post Box 10 01 31, 33501 Bielefeld, Germany (b) Faculty of Economics and Management, University of Magdeburg, Postbox 4120, 39016 Magdeburg, Germany Article History: Received 23 October 2007; Revised 31 March 2009; Accepted 3 April 2009