Environmental taxation and profit-shifting activities

Abstract

We analyse environmental taxation in an international setting, where a multinational company produces a good whose consumption causes a negative externality. We study the joint effects of imperfect competition, corporate tax and profit-shifting activities on the optimal level of environmental taxation. In a two-country framework, we show that in both countries the environmental tax that is set lower than the level allowing to fully internalise environmental costs. Profit shifting causes a further decrease in the low-business-tax country. Finally, we show that policies aimed at reducing profit shifting may have countervailing effects on environmental tax setting.