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State Capacity, Capital Mobility, and Tax Competition

Author

Listed:
  • Arian Daneshmand

    (Faculty of Economics, University of Allameh Tabataba’i, Tehran, Iran.)

  • Mahnoush Abdollah-Milani

    (Faculty of Economics, University of Allameh Tabataba’i, Tehran, Iran.)

Abstract

The theory of international tax competition suggests that governments attempt to attract mobile capital bases by undercutting the foreign capital tax rate. An analysis of the role that state capacity plays in tax policymaking under international pressures is, however, missing. The central contribution of our study is to highlight the importance of the interaction between state capacity and capital mobility. It is the purpose of this article to show whether state capacity increases capital tax rates in a way that tax competition under high capital mobility dampens. Our analysis of 20 OECD countries over the period of 1966-2000 suggests that the increase in capital tax rates as a result of higher state capacity is smaller when capital mobility is high.

Suggested Citation

  • Arian Daneshmand & Mahnoush Abdollah-Milani, 2016. "State Capacity, Capital Mobility, and Tax Competition," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 20(1), pages 33-47, Winter.
    • Handle: RePEc:eut:journl:v:20:y:2016:i:1:p:33
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