CORPORATE INCOME TAXATION OFMULTINATIONALS AND UNEMPLOYMENT

Within a two-country model with involuntary unemployment, this paper investigatescorporate income taxation under separate accounting versus formula apportionment. Incontrast to separate accounting, under formula apportionment the corporate tax policy causesa fiscal externality which goes back to unemployment. This unemployment externality is thelowest when the apportionment formula does not contain a payroll factor. It tends tocompensate other externalities such that tax rates become inefficiently low. In an empiricalcalibration, we show that the transition from separate accounting to formula apportionmentimproves welfare and reduces unemployment. The welfare increase is the strongest under apure sales formula.