Profit Shifting and Firm Dynamics: Explaining the Selection into Tax Havens
Abstract
This paper provides a margin-based evaluation of international anti-profit-shifting policies. I develop a continuous-time heterogeneous-firm model in which firms choose whether to adopt a tax-haven structure and, conditional on adoption, how much profit to shift. The model separates the organizational cost of haven adoption, the marginal cost of shifting, and the home–haven tax differential. Calibrated to 2019 U.S. data, adoption-margin reforms mainly change which firms use havens but leave aggregate shifted profits nearly unchanged because marginal adopters are small and shift little. Enforcement that raises marginal shifting costs and rate coordination that compresses tax differentials have larger direct effects on the tax base and welfare through public-good provision. In the calibrated Stackelberg game, a binding Pillar Two floor removes the haven’s undercutting margin and raises welfare.