International tax competition with rising intangible capital and financial globalization

The last three decades have been characterized by two important trends: (a) the rise in intangible capital as a share of total capital, and (b) the increase in cross country ownership of assets (financial globalization). We study the importance of these two trends for international tax competition in a two-country model where governments choose profit and income tax rates without commitment to future policies and without international coordination. The quantitative exercise shows that the higher share of intangible capital led to lower profit tax rates while the increased cross-country ownership of assets led to higher taxation of profits. The contrasting effects resulted in a small change in profit rate of 1.3% and a small welfare gain of 0.1%.

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