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Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries?

Author

Listed:
  • Aleksandra Riedl
  • Silvia Rocha-Akis

Abstract

To what extent do countries' corporate income tax (CIT) rates attract foreign tax bases? What are the revenue implications of a unilateral tax reduction when tax bases are internationally mobile? These questions are explored using a panel of annual data from 17 OECD countries spanning the period 1982 to 2005. We find significant international fiscal externalities in the form of CIT-induced resource flows. The magnitude, however, indicates that the extent of international corporate tax base mobility is rather modest. Moreover, we find that, on average, a unilateral CIT reduction results in a less-than-proportional increase in the CIT base, thus reducing CIT revenues. The results are robust across a wide range of specifications and point to potential gains from international tax policy coordination.

Suggested Citation

  • Aleksandra Riedl & Silvia Rocha-Akis, 2009. "Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries?," CESifo Working Paper Series 2669, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2669
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp2669.pdf
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How much new revenue will be generated by an increase in federal corporate taxes?
      by Stephen Gordon in Worthwhile Canadian Initiative on 2012-03-11 03:43:59

    Citations

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    Cited by:

    1. Michael Funke & Marc Gronwald, 2009. "A Convex Hull Approach to Counterfactual Analysis of Trade Openness and Growth," CESifo Working Paper Series 2692, CESifo Group Munich.
    2. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers 28, Directorate General Taxation and Customs Union, European Commission.
    3. Doris Prammer, 2011. "Quality of taxation and the crisis: Tax shifts from a growth perspective," Taxation Papers 29, Directorate General Taxation and Customs Union, European Commission.
    4. Bev Dahlby & Ergete Ferede, 2012. "The effects of tax rate changes on tax bases and the marginal cost of public funds for Canadian provincial governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 844-883, December.
    5. Killian J. McCarthy & Frederik van Doorn & Brigitte Unger, 2011. "Tax Competition and the Harmonisation of Corporate Tax Rates in Europe," Chapters,in: International Handbook on the Economics of Integration, Volume II, chapter 20 Edward Elgar Publishing.
    6. Miroslav N. Jovanović (ed.), 2011. "International Handbook on the Economics of Integration, Volume II," Books, Edward Elgar Publishing, number 14136.
    7. Copenhagen Economics, 2011. "Elasticities of Financial Instruments, Profits and Remuneration," Taxation Papers 30, Directorate General Taxation and Customs Union, European Commission.

    More about this item

    Keywords

    tax competition; corporate income tax base elasticity; instrumental variables; international fiscal externalities; Laffer curve; panel data estimation;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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