An Economic Analysis of Extraterritorial Taxation - Mathieu Parenti

Speaker:  Mathieu Parenti, Paris School of Economics

Location: online or at Kiel Institute for the World Economy, Chausseestraße 111, 10115 Berlin

Organizers: Kiel Institute for the World Economy, CEPR

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Abstract: This paper provides an economic analysis of extraterritorial taxation, whereby a country imposes top-up taxes on the foreign profits of multinationals accessing its market to enforce a minimum effective rate. We characterize incidence, welfare, and optimal unilateral policy in a flexible monopolistic-competition model, with extensions to oligopoly and carbon taxation. Four results emerge. First, extraterritorial taxation raises revenue but distorts prices upward in the taxing country and downward elsewhere through sales reshuffling; when foreign profits are untaxed, revenue gains dominate consumer losses for any country, regardless of size. Second, with a positive foreign rate welfare effects become ambiguous: the optimal top-up rises with domestic market share and falls with the foreign rate, so only sufficiently large coalitions can overtax already-taxed firms. Third, extraterritorial profit taxation welfare-dominates tariffs. Fourth, per-capita gains rise more than proportionally with coalition size. Rather than provoking retaliation, extraterritorial collection inverts tax competition and generates incentives for a race to the top — a logic that extends naturally to carbon pricing.