Lifestyle Taxes in the Presence of Profit Shifting

Rosella Levaggi,Paolo M Panteghini,Carmen Marchiori

doi:10.2139/ssrn.3551805

Rosella Levaggi, Paolo M Panteghini + Show 1 more

Open Access

https://doi.org/10.2139/ssrn.3551805

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Abstract

Non-communicable diseases (NCDs) cause about 71% of all deaths globally and a considerable increase in health care costs. To tackle this problem, several Governments have designed “sin taxes”, i.e, extra payments related to the quantity of unhealthy contents of specific goods. However, unhealthy food and soda drinks are often produced by multinational companies for which also profit shifting is a serious issue. The international dimension of these markets may have a dramatic impact on the actual implementation of sin taxes. This article contributes to the literature by analysing the effectiveness of sin taxes levied on a good produced by a multinational company. Our analysis shows that a trade off between profit shifting and lifestyle taxes may exist. In general, the First Best sin tax cannot be levied if Governments are also interested in corporate tax revenue. This is a quite interesting policy issue: countries that today benefit from profit shifting may find it harder to impose significant lifestyle taxes. We also provide some insights about the effects that the international effort to fight profit shifting may have on lifestyle taxes.

Highlights

According to WHO (2017), non-communicable diseases (NCDs) kill about 40 million people each year, equivalent to 70% of all deaths globally.1 Tobacco use, physical inactivity, the harmful use of alcohol and unhealthy diets all increase the risk of dying from a Non-communicable diseases (NCDs)
If Government cares about corporate tax revenue, the optimal lifestyle tax is always sub-optimal
>1 the lifestyle tax will be equal to Obesity has almost tripled since 1975. It is widespread phenomenon, its consequences are far greater in developing countries because obesity coexists with malnutrition/under-nutrition; because the limited resources of health care systems, obesity and related non communicable diseases cause a larger number of deaths than in developing countries

Summary

Introduction

According to WHO (2017), non-communicable diseases (NCDs) kill about 40 million people each year, equivalent to 70% of all deaths globally. Tobacco use, physical inactivity, the harmful use of alcohol and unhealthy diets all increase the risk of dying from a NCD. Are the major players in this market and are all multinationals For these industries, prot allocation among countries is standard practice, and a change in the local demand may change prot shifting incentives. A reduction in the demand in countries using lower corporate tax rates may sensibly reduce their tax base (through a reduction in prot shifting). This in turn causes big corporate tax revenue losses. If a sales apportionment formula is chosen, the multinational aspect may be ignored in setting the tax rate In this respect, we suggest that in choosing the base for apportionment, the interaction among several types of taxes should be considered.

The model

Prot shifting and production location choices

Optimal sin tax with prot shifting

The impact of policies to reduce prot shifting

Findings

Conclusions