Equilibrium conditions in corporate tax competition and Foreign Direct Investment flows
AbstractWe consider a collection of countries which attempt to maximize their corporate tax revenue, the latter being viewed as a function of Foreign Direct Investment (FDI) inflow and the Effective Average Tax Rate (EATR) which each country sets for itself. Under a model that assumes a direct influence of tax differentials on the flow of FDI, each country's decisions are naturally ‘coupled’ to those of others, leading to a non-cooperative game in which countries–players compete for FDI inflows by sequentially altering their tax rates. Their decisions are made via a differential equation-based model used to predict the effect of tax rate changes on a player's share of FDI inflows. Our model, calibrated using empirical data from 12 OECD countries for the period 1982–2005, combines FDI inflow and tax-rate differentials to arrive at a “steady-state” FDI inflow share for each player, given its competitors' corporate tax rates. We explore the game's equilibrium, including the question of whether equilibrium necessarily implies a ‘race to bottom’, with low corporate tax rates for all players.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 28 (2011)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/inca/30411
Corporate tax competition; FDI inflows; Corporate Income Tax Revenue; Effective Average Tax Rates;
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- H8 - Public Economics - - Miscellaneous Issues
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- Fernández-de-Córdoba, Gonzalo & Torres, José L., 2012. "Fiscal harmonization in the European Union with public inputs," Economic Modelling, Elsevier, vol. 29(5), pages 2024-2034.
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