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Is international tax competition only about taxes? A market-based perspective

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  • Azémar, Céline
  • Desbordes, Rodolphe
  • Wooton, Ian

Abstract

This paper revisits tax competition among governments for foreign direct investment (FDI) by considering the role played by the economic dynamism of competitors on the setting of corporate tax rates (CTRs). Using a database with worldwide coverage over the period 1995–2014, we find that strong growth performance of neighbouring countries is associated with a lower CTR, especially in developed countries. This spatial effect is particularly manifest if competing countries are large and open to capital flows. These results appear to hold in most regions of the world and suggest that governments perceive foreign economic dynamism as a threat, leading them to reduce their CTRs to maintain their FDI attractiveness.

Suggested Citation

  • Azémar, Céline & Desbordes, Rodolphe & Wooton, Ian, 2020. "Is international tax competition only about taxes? A market-based perspective," Journal of Comparative Economics, Elsevier, vol. 48(4), pages 891-912.
  • Handle: RePEc:eee:jcecon:v:48:y:2020:i:4:p:891-912
    DOI: 10.1016/j.jce.2020.05.002
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    More about this item

    Keywords

    Tax competition; Country size; Foreign direct investment; Developing countries; Free-trade zones; Spatial lag;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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