Tax policy competition under destination-based taxation

Abstract

We extend Bond and Gresik (On the incentive compatibility of universal adoption of destination-based cash flow taxation, International Tax and Public Finance, October 2022) by analyzing the equilibrium capital expense deduction policies that arise when countries compete for multinational investment under destination-based taxation. Bond and Gresik proved that destination-base cash flow taxation cannot arise as a tax competition equilibrium. We show that policies that allow for no deduction (income taxation) and those that allow a partial deduction can arise in equilibrium. In the former case, public good provision will be efficient. In the latter case, weak over-provision of the public good will arise.