Incentive Theory 3. Tax Competition With Parasitic Tax Xxxxxx - Xxxxxxx & Xxxxxx (2006): 58
Incentive Theory 3. Tax Competition With Parasitic Tax Xxxxxx – Xxxxxxx & Xxxxxx (2006): This article provides a view to the welfare effects from full or partial elimination of tax xxxxxx. The authors consider the welfare effect for the world economy as well as the welfare effects on the country level. The paper is interesting in the context of this thesis since it takes the practices of tax xxxxxx into account in a direct manner and assesses what would happen in terms of welfare if all or some jurisdictions seized to operate as tax xxxxxx. The main assumptions; Xxxxxxx & Xxxxxx (2006) assume that the world consists of a large number of countries. Some in which they operate as tax xxxxxx, and others in which they do not. The countries are assumed to be asymmetrical. The tax xxxxxx are modeled as countries offering a tool to escape national taxation imposed by residence countries. The equilibrium price for this tool is assumed to depend on demand. The demand is related to the tax systems 28 These jurisdictions will be discussed in further detail in chapter five of this thesis. of countries, the resources used on tax enforcement in the non-xxxxxx and the technology the tax xxxxxx use. It is assumed that investors need one unit of capital to build up a company. Once established, the firms hire labor and decide how much income to shelter in tax xxxxxx. The firms are assumed to be identical with regards to production technology. The employment and output is thus identical across firms. At the same time, firms are assumed to differ in the cost of setting up operations in tax xxxxxx. The authors assume that individuals maximize their utility functions while companies aim to maximize their expected returns. The governments are assumed to be welfare optimizing. The individuals can evade tax on their wages, and will engage in tax evasion as long as the costs related to this activity are offset by the benefits from evading taxes. The companies are assumed to be able to reduce their tax base by purchasing tax haven services. Companies will do this given that the taxes saved on using tax xxxxxx more than offsets the costs related to using them. The authors assume that two costs occur when engaging in tax haven activities, a set up cost and a variable cost. The variable cost of buying tax haven services is subtracted from the taxes saved when using concealment services. If the residual exceeds the set up cost of using tax xxxxxx, the company will chose to buy tax haven services. The govern...
