A GENERAL MODEL OF THE BEHAVIORAL RESPONSE TO TAXATION: Other Applications and Conclusions

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The insights obtained from generalizing the standard model in this way apply not only to the labor-leisure choice, but also to a wide range of other problems. As an example, how does the statutory tax rate affect the saving of a high-income individual who faces a menu of tax-preferred vehicles for saving? The key lies in whether the cost of avoiding taxation depends on the volume of saving. If it does, then the true marginal tax on saving is less than the statutory rate. add comment

Another application of the general model is the investment location decisions faced by a multinational corporation. The worldwide pattern of tax rates and tax systems has two conceptually distinct impacts. First, it can affect the relative return to conducting real operations in different jurisdictions, and therefore the location of real activity. Second, given the location of real activity, taxes can affect the jurisdiction to which taxable income is reported; through the careful use of intra-corporate transfer prices and financial policy, multinational enterprises can reduce their worldwide tax burden by shifting reported taxable income into countries whose marginal tax rate is relatively low. Because the cost to shifting reported income is itself affected by the pattern of real operations, the two impacts of taxation are interrelated. To the extent that the cost of shifting reported income is reduced by having real operations in a low-tax country, the shifting opportunity provides an implicit subsidy to real investment in that low-tax country.