Browsing by Subject "economic geography"

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  • Gangnuss, Danila (2005)
    The European Union has created a massive market for goods, services, capital and labour. In principle, goods and services as well as factors of production can move freely across the national borders within the European Union. Migration of the factors of production is driven by the country-specific differences in marginal productivity. As a result of this, migration ensures the most efficient use of the factors of production and therefore promotes the general welfare. However, international mobility of the factors of production might threaten national welfare of the countries that participate in economic integration. For some of the countries, this raises concerns about loosing factors of production in favor of the other member-states of the European Union. The purpose of this thesis is to analyze how mobility of skilled labour affects income taxation decisions in the countries that face economic integration. The thesis identifies optimal patterns of taxes and of public expenditures in the countries that face international agglomeration of industry. It poses the question of whether there exists an optimal size of the public sector in the presence of economic integration. Starting with the core-periphery models of Krugman (1991a), Fujita et al. (1999) and Forslid (1999), the thesis considers a new economic geography model of tax competition (Andersson and Forslid 2001), where two initially identical countries compete for internationally mobile skilled workers. The model contains two types of equilibria. In the dispersed equilibrium, manufactured production and skilled workers are located in both countries. In the agglomerated equilibrium, manufactured production and skilled workers are concentrated in one of the countries. For both types of equilibrium we construct taxes, which are optimal for the purpose of preserving current distribution of manufactured production and of skilled workers. We show that it is always optimal to tax the income of skilled workers at some positive rate. In the dispersed equilibrium, taxes on the income of skilled workers cannot be increased above some critical level without producing agglomeration of industry. However, in the agglomerated equilibrium, economic integration decreases sensitivity of skilled workers with respect to fiscal incentives. As a result of this, the scope for income taxation of skilled workers in the agglomerated equilibrium does not monotonically decline with trade costs. We also show that taxes on the income of unskilled workers determine the size of the public sector in the dispersed equilibrium but not in the agglomerated equilibrium. It is interesting that in the country, which contains agglomeration of industry, taxes on the income of unskilled workers can be decreased without reducing the size of the public sector.
  • Kerko, Santtu (Helsingin yliopisto, 2020)
    When dependent firms trade with one another, no usual market incentives apply to the pricing decision. Prices determined in such a case are called transfer prices. Global differences in corporate tax rates encourage multinational enterprises to manipulate their transfer prices to shift profits to avoid taxes. It is estimated that one third to over half of global trade value is between related parties, making potential tax gains large from transfer mispricing. Literature has proposed transfer mispricing to be one of the major channels for international profit shifting. This thesis examines whether transfer mispricing can be found in export prices of Finnish multinational enterprises. The data set is obtained by merging Finnish Customs data on International Trade in Goods in 2014-2017 and Statistics Finland Enterprise Group Register. By combining the two data sets, information on export prices on firm, product and destination level are tagged with information on dependencies in the destination country. This allows comparing intra-firm trade prices with independent trade prices. The model used to distinguish transfer mispricing is a fixed effects difference-in-differences regression, where differences in independent and dependent export prices are compared in their response to destination tax differences. Information on firm, product, export date and destination characteristics are used to control for differences between independent and dependent trade prices that are not explained by tax motivations. The results provide evidence of transfer mispricing in magnitude comparable to the previous research. A 10 percent decrease in destination tax rate is estimated to lead to 1.2 percent decrease in intra-firm export prices of Finnish multinational enterprises. This implies 0.8 billion euros of underreported exports in 2017, totaling 160 million euros of corporate tax losses. These results are questioned by using a more robust method than applied in previous empirical literature. According to the more conservative estimates, the main evidence of transfer mispricing loses statistical significance. The results give broad confidence intervals for transfer mispricing of Finnish multinational enterprises, which do not cancel out either large-scale profit shifting or nonexistent price manipulation. They encourage further research on the subject exploiting more detailed data on transaction level dependencies. In addition, the role of foreign affiliates in transfer mispricing calls for more detailed data.