Profit Taxation, Monopolistic Competition and International Relocation of Firms

Abstract

This paper presents a two-country monopolistic competition trade

model to analyze how the profit taxation determines the location

of firms and national welfare. Profit tax cuts may increase or decrease

the number of firms in a country, depending on the elasticities

of substitution between domestic and foreign goods and

between goods produced in the same country. Accordingly, profit

tax cuts may increase or decrease domestic consumption and welfare,

depending on these elasticities. The paper provides parameter

conditions under which a decrease in the domestic profit tax attracts

foreign firms and increases domestic welfare.