Why Corporate Taxes May Rise: The Case of Trade Liberalization and Foreign Ownership

Almost all the literature on tax competition in the presence of multinationals (MNCs) and profit shifting ignores trade costs. This paper studies how economic integration, in terms of reduced trade costs and internationalization of ownership affects tax competition and equilibrium corporate taxes. We find that equilibrium taxes increase subsequent to a reduction of trade costs if MNCs are owned by home country residents and also subsequent to increased internationalisation of ownership.