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What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks

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  • Michael Overesch
  • Johannes Rincke

Abstract

We reassess the driving forces behind the recent decline of corporate tax rates in Europe. Using data for up to 32 countries from 1983 to 2006, we analyze the role of economic and financial openness as well as tax competition while allowing for dynamic adjustment to shocks and period-specific as well as country-specific effects. While openness does not seem to be systematically related to corporate tax rates, our findings suggest that countries compete over statutory tax rates. In contrast, we do not find competition over effective marginal rates. While the short-run impact of tax competition on corporate tax rates seems to be modest, the interplay of tax competition and a sluggish adjustment of tax rates over time implies that permanent shocks to individual countries have substantial long-run effects on equilibrium tax levels in all countries.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 113 (2011)
Issue (Month): 3 (09)
Pages: 579-602

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Handle: RePEc:bla:scandj:v:113:y:2011:i:3:p:579-602

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Citations

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Cited by:
  1. Estelle P. Dauchy & Christopher Balding, 2013. "Asymmetric Trade Estimator in Modified Gravity: Corporate Tax Rates and Trade in OECD Countries," Working Papers w0200, Center for Economic and Financial Research (CEFIR).
  2. Hansson, Åsa & Porter, Susan & Perry Williams, Susan, 2012. "The Effect of Political and Economic Factors on Corporate Tax Rates," Working Paper Series 942, Research Institute of Industrial Economics.
  3. Mittermaier, Ferdinand & Rincke, Johannes, 2013. "Do countries compensate firms for international wage differentials?," Journal of Public Economics, Elsevier, vol. 102(C), pages 23-36.
  4. Michael Devereux & Simon Loretz, 2012. "What do we know about corporate tax competition?," Working Papers 1229, Oxford University Centre for Business Taxation.
  5. Bob Chirinko & Daniel J. Wilson, 2007. "Tax competition among U.S. states: racing to the bottom or riding on a seesaw?," Working Paper Series 2008-03, Federal Reserve Bank of San Francisco.
  6. Loretz, Simon & Moore, Padraig J., 2009. "Corporate tax competition between firms," Working Papers in Economics and Finance 2009-3, University of Salzburg.
  7. Christina Elschner & Jost H. Heckemeyer & Christoph Spengel, 2011. "Besteuerungsprinzipien und effektive Unternehmenssteuerbelastungen in der Europäischen Union: Regelt sich die EU‐weite Steuerharmonisierung von selbst?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(1), pages 47-71, 02.
  8. Osterloh, Steffen & Debus, Marc, 2012. "Partisan politics in corporate taxation," European Journal of Political Economy, Elsevier, vol. 28(2), pages 192-207.
  9. Mauro Ghinamo & Paolo Panteghini & Federico Revelli, 2010. "FDI determination and corporate tax competition in a volatile world," International Tax and Public Finance, Springer, vol. 17(5), pages 532-555, October.
  10. Martin Jacob & Andreas Pasedag & Franz W. Wagner, 2011. "Werden niedrige Steuersätze in Osteuropa durch Verzicht auf Verlustverrechnung erkauft?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(1), pages 72-91, 02.
  11. Nelly Exbrayat & Benny Geys, 2014. "Trade integration and corporate income tax differentials," International Tax and Public Finance, Springer, vol. 21(2), pages 298-323, April.
  12. Johannes Becker & Ronald B. Davies, 2013. "Learning and international policy diffusion: the case of corporate tax policy," Working Papers 1319, Oxford University Centre for Business Taxation.
  13. Suzuki, Masaaki, 2014. "Corporate effective tax rates in Asian countries," Japan and the World Economy, Elsevier, vol. 29(C), pages 1-17.
  14. Markus Leibrecht & Claudia Hochgatterer, 2012. "Tax Competition As A Cause Of Falling Corporate Income Tax Rates: A Survey Of Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 26(4), pages 616-648, 09.
  15. Gregor Schwerhoff & Ottmar Edenhofer, 2014. "The Globalization Paradox Revisited," CESifo Working Paper Series 4878, CESifo Group Munich.
  16. Kindermann, Daniel, 2009. "Why do some countries get CSR sooner, and in greater quantity, than others? The political economy of corporate responsibility and the rise of market liberalism across the OECD: 1977-2007," Discussion Papers, Research Unit: Knowledge, Production Systems and Work SP III 2009-301, Social Science Research Center Berlin (WZB).
  17. Robert S. Chirinko & Daniel J. Wilson, 2010. "State business taxes and investment: state-by-state simulations," Economic Review, Federal Reserve Bank of San Francisco, pages 13-28.
  18. Masaaki Suzuki, 2013. "Corporate Effective Tax Rates in Asian Countries," KIER Working Papers 875, Kyoto University, Institute of Economic Research.

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