Advanced Search
MyIDEAS: Login to save this paper or follow this series

Tax competition in the eurozone: Capital mobility, agglomeration, and the small country disadvantage

Contents:

Author Info

  • Rademacher, Inga
Registered author(s):

    Abstract

    The increasing economic integration among OECD countries since the late 1970s has attracted much attention in tax policy research. Although several studies have tested whether capital mobility induces a race to the bottom in capital taxation, the two approaches - competition and compensation theory - provide diametrically opposed answers to this question. One theory predicts a reduction in taxation, the other a stagnation or increase in taxation. This paper examines the question once again. However, instead of aggregating all OECD countries into one sample, it compares EMU countries - with nearly perfect capital mobility - to non-EMU countries in a difference-in- differences regression. Controlling for market size, I found that the EMU led to a divergence in taxation for small and large countries. Although the reduction in small countries could be explained by competition theory, the increase in large countries is not in line with the conventional theories. I argue that agglomeration forces give large countries an advantage in terms of attracting foreign direct investment (FDI) because of beneficial supply and demand chains. Small countries are disadvantaged in terms of capital attraction, which they counter by reducing capital taxation. -- Die zunehmende wirtschaftliche Integration der OECD-Länder seit den späten 1970er- Jahren ist für die Steuerforschung von großem Interesse. In verschiedenen Studien wurde bereits untersucht, ob Kapitalmobilität zu einer Abwärtsspirale bei der Kapitalbesteuerung führt. Doch die Analysen der beiden Literaturstränge - Wettbewerbs- sowie Kompensationstheorie - kommen zu gegensätzlichen Ergebnissen. Während eine Theorie eine Senkung der Besteuerung prognostiziert, prophezeit die andere eine Stagnation oder einen Anstieg. Dieses Papier untersucht die Frage ein weiteres Mal, erstmalig allerdings auf der Basis eines Vergleichs von EWU-Ländern - mit fast perfekter Kapitalmobilität - und Nicht-EWU-Ländern. Die Difference-in-Differences-Regression zeigt, dass die EWU divergierende Entwicklungen in der Besteuerung kleiner und großer Länder befördert hat. Während die Reduzierung der Besteuerung in kleinen Staaten mit der Wettbewerbstheorie erklärt werden könnte, ist der Anstieg in großen Mitgliedsstaaten nicht mit den herkömmlichen Theorien vereinbar. Die Autorin argumentiert, dass Agglomerationskräfte den großen Mitgliedsstaaten durch günstige Liefer- und Nachfrageketten einen Vorteil im Hinblick auf ausländische Direktinvestitionen verschaffen. Kleine Staaten sind wegen ihrer geringeren Kapitalattraktivität benachteiligt, der sie mit einer Senkung der Kapitalbesteuerung entgegenwirken wollen.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://econstor.eu/bitstream/10419/82644/1/768188121.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Max Planck Institute for the Study of Societies in its series MPIfG Discussion Paper with number 13/13.

    as in new window
    Length:
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:zbw:mpifgd:1313

    Contact details of provider:
    Postal: Paulstr. 3, 50676 Köln
    Phone: + 49 (0) 221-2767-0
    Email:
    Web page: http://www.mpifg.de/
    More information through EDIRC

    Related research

    Keywords:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Fredrik Andersson & Rikard Forslid, 2003. "Tax Competition and Economic Geography," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 279-303, 04.
    2. Mario Jametti & Marius Brülhart & Kurt Schmidheiny, 2007. "Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials?," Working Papers 2007_9, York University, Department of Economics.
    3. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
    4. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    5. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 249-275, February.
    6. Hannes Winner, 2005. "Has Tax Competition Emerged in OECD Countries? Evidence from Panel Data," International Tax and Public Finance, Springer, vol. 12(5), pages 667-687, September.
    7. Petroulas, Pavlos, 2004. "The Effect of the Euro on Foreign Direct Investment," Research Papers in Economics 2004:5, Stockholm University, Department of Economics.
    8. Garrett, Geoffrey, 1995. "Capital mobility, trade, and the domestic politics of economic policy," International Organization, Cambridge University Press, vol. 49(04), pages 657-687, September.
    9. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    10. Dani Rodrik, 1997. "Trade, Social Insurance, and the Limits to Globalization," NBER Working Papers 5905, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Lukas Hakelberg, 2014. "The Power Politics of International Tax Cooperation. Why Luxembourg and Austria accepted automatic exchange of information on foreign account holders’ interest income," EUI-RSCAS Working Papers p0375, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:zbw:mpifgd:1313. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.