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Do government preferences matter for tax competition?

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  • Yongzheng Liu

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Abstract

This paper explores how government preferences affect capital tax decisions of a country. We develop a model in which governments, differentiating in their preferences for economic development and income equality, compete for mobile capital over corporation taxes. The key prediction of the model, borne out in data from OECD countries over the years 1990–2012, is that an increase in government preferences for pursuing economic development relative to income equality makes countries’ horizontal tax reactions stronger. Unlike the existing studies, our result contributes to the tax competition literature by highlighting the importance of government preferences in determining the extent of tax competition among countries and so offering a novel explanation for the widely observed heterogeneous tax policies across countries. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Yongzheng Liu, 2016. "Do government preferences matter for tax competition?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(2), pages 343-367, April.
  • Handle: RePEc:kap:itaxpf:v:23:y:2016:i:2:p:343-367
    DOI: 10.1007/s10797-015-9367-y
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    Keywords

    Tax competition; Government preferences; Asymmetric tax reactions; H25; R11; R50;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

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