Multinational firms are known to shift profits and countries are known to compete over shifty profits. Two major principles for corporate taxation are Separate Accounting (SA) and Formula Apportionment (FA). These two principles have very different qualities when it comes to preventing profit shifting and preserving national tax autonomy. Most OECD countries use SA. In this paper we show that a reduction in trade barriers lowers equilibrium corporate taxes under SA, but leads to higher taxes under FA. From a welfare point of view, the choice of tax principle is shown to depend on the degree of economic integration. D 2004 Published by Elsevier B.V. .no (H.J. Kind)8 karen.midelfart@nhh.no (K.H. Midelfart). 1 Tel.: +47 55 95 95 90; fax: +47 55 95 93 50. 2 Tel.: +47 55 95 95 10; fax: +47 55 95 93 50.

We develop a model where trade liberalization leads to skill-biased technological change, which in turn raises the relative return to skilled labor. When …rms get access to a larger market, the relative pro…tabil-ity of di¤erent technologies changes so that the relative pro…tability of the more skill-intensive technology increases. As the composition of …rms changes to one with predominantely skill-intensive …rms, the relative demand for skilled labor increases. This way, we establish a link between trade, technology and relative returns to skilled and unskilled labor.

This is an electronic version of an Article published in the Journal of common market studies 41(5), pp. 847-868

The authors would like to thank staff at the Directorate General for Economic and Financial Affairs for help and comments. In particular, Adriaan Dierx, Martin Hallet, Karel Havik and Fabienne Ilzkovitz have helped with data and provided specific comments that have substantially improved the final report. Danny Quah, Victor Norman, Jan Haaland and Diego Puga have commented extensively on earlier drafts of this report and helped us resolve a number of important issues. Gordon Hanson kindly provided us with US data. Finally, Sandra Bulli, Monica Baumgarten de Bolle and Beatriu Canto and Dhush Puwanarajah have provided invaluable research assistance.

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