Lower Taxes for One, More Money for All? Profit Shifting and its Economic Effects

Abstract

The European Union recently pursued litigation on the multinational enterprise Apple Incorporated, accusing the company of owing the Irish government over $14.8 billion in back taxes due to tax avoidance deals with the country . This case provides a glimpse into the global concern over the use of tax havens. This paper explores the effects of Apple's profit-shifting on the economic surplus of their retail market, estimating the effect of the taxes avoided by the company on the consumer surplus. The results are inconclusive. I find a positive correlation between the amount of tax avoided and consumer surplus for the iPod Nano consumers but a negative correlation for the iPhone consumers. It is difficult to achieve a definitive conclusion because the data has a limited number of observations and the consumer surplus proxy does not account for willingness to pay that might change with the different models of Apple products. Further research should be directed to overcome these limitations.