Do Government Preferences Matter for Tax Competition?

This paper explores how government preferences a ect the choices of capital tax rates in the presence of tax competition. We develop a model in which governments, di erentiating in their preferences for economic development and regional equality, compete for mobile capital over corporation taxes. The key prediction of the model, borne out in data from OECD countries over the years 1990-2007, is that countries emphasizing more on economic development tend to choose lower level of corporate income tax rates than the counterparts that stressing more on regional equality. Our result contributes to the tax competition literature by advancing a new element, heterogeneous government preferences, as another potential source of asymmetric tax policy responses that is widely observed across countries.