A.K. Parai International Review of Economics and Finance 8 1999 317–326 323
Assuming stability, Eqs. 31 and 32 ensure that an increase in corporate profit tax would decrease the MNC’s on-site production, and increase its export. But the effects
of the tax on the total sales of the MNC and of the host firm are not so clear cut. A sufficient condition for dx
1
1 x
2
dt , 0, or dydt . 0 is {x
1
P9 [C
″
1
1 2 t 1 P9t] 1 [P 1 x
1
P9 2 C9
1
C ″
2
2 P9t
]} . 0. 39
Once Eq. 39 is assumed, Eqs. 35–38 would show that dx
1
1 x
2
1 y
dt , 0, dP dt .
0, dPdt , 0, and dpdt _ 0. Under condition of Eq. 39, the corporate profit tax will have the same effects as the tariff on aggregate sales, price, and the net profit
of the MNC. The tax will increase the host firm’s market share and gross profit, but it may reduce its net profit. Thus, unlike a tariff, the corporate profit tax may fail to
shift rent away from the foreign to the host firm.
In the following section, I provide a numerical example where a rise in profit tax rate is shown to lower the net earnings of both firms. In this example, then, a cut in
the rate of profit tax would increase the market output and also the net earnings of the firms.
4. Numerical example: Export-cum-on-site-production
Let the demand and cost functions be given as follows. P 5
2 2 x
1
1 x
2
1 y
, P9 5 2
1, P
″ 5
0. 40
C x
1
5 0.5x
2 1
, C9
1
5 x
1
, C
″
1
5 1.0.
41 C
x
2
5 x
2 2
, C9
2
5 2x
2
, C
″
2
5 2.0.
42 C
y 5 0.5y
2
, C9
y
5 y
, C
″
y
5 1.0.
43 Now I substitute these numerical values in Eqs. 16–18 and obtain the following
equations. 2
31 2 tx
1
2 2 2 tx
2
2 1 2 ty 5 221 2 t.
169 2
2 2 tx
1
2 4x
2
2 y 5 2
2 2 t. 179
2 x
1
2 x
2
2 3y 5 22
189 The coefficient determinant of the system given by Eqs. 169–189 is |D
″ | ; 2t
2
1 21t 2 21. The explicit solution of the system will yield the following.
x
1
5 [12t 1 2tt 2 5t 2 8][2t
2
1 21t 2 21],
x
2
5 [4t
2
2 8tt 1 8t 2 4][2t
2
1 21t 2 21],
and y 5
[10t 1 2tt 2 t 2 10][2t
2
1 21t 2 21].
I assume the following three scenarios: a initial situation of no-tax and no-tariff t 5 0, t 5 0; b no-tax, positive tariff situation with t 5 0, t 5 0.10; and c positive
tax, no-tariff situation with t 5 0.10, t 5 0.
324 A.K. Parai International Review of Economics and Finance 8 1999 317–326
Table 1 Calculation of variables
a b
c t 5 t 5
t 5 0.10, t 5 0
t 5 0, t 5 0.10
x
1
0.3809 0.4048
0.3602 x
2
0.1905 0.1524
0.2097 x
1
1 x
2
0.5714 0.5572
0.5699 y
0.4762 0.4809
0.4767 x
1
1 x
2
1 y
1.0476 1.0381
1.0466 y
x
1
1 x
2
1 y
0.4545 0.4632
0.4555 x
1
1 y
0.8571 0.8857
0.8369 p
0.9524 0.9619
0.9534 P
0.4354 0.4308
0.4345 P
0.4354 0.4156
0.4067 p
0.3401 0.3470
0.3409 p
0.3401 0.3470
0.3069 P
and p denote the gross profits of the MNC and the host firm respectively, whereas P and p stand for the corresponding net profits.
Now I calibrate the values of different variables—x
1
, x
2
, y, P, P, p, etc., and put those in Table 1. From Table 1 one can see that while a tariff would shift net profit
away from foreign to domestic firm, a tax would not. Furthermore, from rows 1, 4, 6 and 7 of Table 1 it is clear that an increase in tariff rate from 0 to 0.10 would raise
the domestic production of each firm. Thus the tariff raises total domestic production x
1
1 y
. Because it decreases import x
2
by a greater percentage, the total sale in the host market goes down. The tariff also increases the market share and net profit
of the domestic firm, and reduces those of the foreign firm. This confirms the rent- shifting characteristics of a tariff even under export-cum-on-site-production regime.
An increase in the profit tax rate from 0 to 0.10 would increase the domestic output and market share of the host firm, and lower the on-site production of the MNC such
that the total domestic production x
1
1 y
goes down. Thus while an increase in tariff would create more domestic jobs, an increase in the profit tax rate would reduce it.
Moreover, even though the tax raises the gross profit of the host firm and lowers that of the foreign firm, it lowers the net profits of both. Thus, for the host government,
perhaps a corporate tax cut policy would be a better alternative because it would serve the purpose of creating more domestic jobs while increasing the net income of
both foreign and domestic firms. Besides, while a tariff necessarily raises domestic price, a cut in the corporate tax rate lowers it.
5. Concluding remarks
