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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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Suggested Citation

  • Michael Overesch & Johannes Rincke, 2011. "What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(3), pages 579-602, September.
    • Handle: RePEc:bla:scandj:v:113:y:2011:i:3:p:579-602
    DOI: j.1467-9442.2011.01650.x
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    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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