Corporate Taxation, Profit Shifting, and the Efficiency of Public Input Provision

In this paper we analyze the implications for the national provision of public inputs when profit shifting is possible, albeit costly, for internationally integrated firms. In this case a high level of public infrastructure will attract real investment, but the firm can at least partly avoid to pay correspondingly high corporate taxes. In contrast to much of the recent literature on capital tax competition and public infrastructure provision, we thus find that public inputs will be unambiguously underprovided when the corporate tax falls only on pure profits and international taxation follows the source principle. Extensions of the basic model cover the case of distortive capital taxes and alternative international tax regimes.