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Capital Mobility, Agglomeration and Corporate Tax Rates: Is the Race to the Bottom for Real?

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  • Harry Garretsen
  • Jolanda Peeters
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    Abstract

    Based on a data set for 19 OECD countries for the period 1981-2001, we estimate the impact of capital mobility (FDI) on corporate tax rates. So far the literature has been concerned with the related but rather different question as to the sensitivity of FDI to tax rates. Our paper takes an opposite perspective and asks what the impact of capital mobility is on corporate tax rates. In doing so, we explicitly take the role of agglomeration into account. In theory, core countries can afford a higher tax rate compared to peripheral countries. In our estimation strategy, we instrument capital mobility to deal with reverse causality. The main conclusion isthat increased international capital mobility implies a lower corporate tax rate. But we also find that agglomeration matters: core countries have a higher corporate tax rate. If there is a race to the bottom, it seems that it is more real for some countries than others.

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    File URL: http://www.dnb.nl/binaries/Working%20Paper%20113-2006_tcm46-146770.pdf
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    Bibliographic Info

    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 113.

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    Date of creation: Sep 2006
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    Handle: RePEc:dnb:dnbwpp:113

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    Related research

    Keywords: new economic geography; corporate income taxation; capital mobility;

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    1. Keith Head & Thierry Mayer, 2004. "The Empirics of Agglomeration and Trade," Sciences Po publications info:hdl:2441/10191, Sciences Po.
    2. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," International Trade 9801001, EconWPA.
    3. Steven Brakman & Harry Garretsen & Marc Schramm, 2005. "Putting New Economic Geography to the Test: Free-ness of Trade and Agglomeration in the EU Regions," CESifo Working Paper Series 1566, CESifo Group Munich.
    4. Kevin H. O'Rourke & Jeffrey G. Williamson, 2001. "Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650592, December.
    5. Assaf Razin & Yona Rubinstein & Efraim Sadka, 2005. "Corporate Taxation and Bilateral FDI with Threshold Barriers," NBER Working Papers 11196, National Bureau of Economic Research, Inc.
    6. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Seven Fun Facts About Corporate Taxes
      by Justin Fox in HBR Blog Network on 2013-05-23 18:28:15

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