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Capital Mobility, Agglomeration and Corporate Tax Rates: Is the Race to the Bottom for Real?

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  • Harry Garretsen
  • Jolanda Peeters

Abstract

Based on a data set for 19 OECD countries for the period 1981-2001, we estimate the impact of capital mobility (FDI) on corporate tax rates. So far the literature has been concerned with the related but rather different question as to the sensitivity of FDI to tax rates. Our paper takes an opposite perspective and asks what the impact of capital mobility is on corporate tax rates. In doing so, we explicitly take the role of agglomeration into account. In theory, core countries can afford a higher tax rate compared to peripheral countries. In our estimation strategy, we instrument capital mobility to deal with reverse causality. The main conclusion isthat increased international capital mobility implies a lower corporate tax rate. But we also find that agglomeration matters: core countries have a higher corporate tax rate. If there is a race to the bottom, it seems that it is more real for some countries than others.

Suggested Citation

  • Harry Garretsen & Jolanda Peeters, 2006. "Capital Mobility, Agglomeration and Corporate Tax Rates: Is the Race to the Bottom for Real?," DNB Working Papers 113, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:113
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    References listed on IDEAS

    as
    1. Steven Brakman & Harry Garretsen & Marc Schramm, 2005. "Putting New Economic Geography to the Test: Free-ness of Trade and Agglomeration in the EU Regions," CESifo Working Paper Series 1566, CESifo.
    2. Brakman, Steven & Garretsen, Harry & Schramm, Marc, 2006. "Putting new economic geography to the test: Free-ness of trade and agglomeration in the EU regions," Regional Science and Urban Economics, Elsevier, vol. 36(5), pages 613-635, September.
    3. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    4. Head, Keith & Mayer, Thierry, 2004. "The empirics of agglomeration and trade," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 59, pages 2609-2669, Elsevier.
    5. Ludema, Rodney D. & Wooton, Ian, 2000. "Economic geography and the fiscal effects of regional integration," Journal of International Economics, Elsevier, vol. 52(2), pages 331-357, December.
    6. Assaf Razin & Yona Rubinstein & Efraim Sadka, 2005. "Corporate Taxation and Bilateral FDI with Threshold Barriers," NBER Working Papers 11196, National Bureau of Economic Research, Inc.
    7. Kevin H. O'Rourke & Jeffrey G. Williamson, 2001. "Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650592, September.
    8. repec:dgr:rugccs:200502 is not listed on IDEAS
    9. Giorgio Barba Navaretti & Anthony J. Venables, 2006. "Multinational Firms in the World Economy," Economics Books, Princeton University Press, edition 1, number 7832, October.
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    More about this item

    Keywords

    new economic geography; corporate income taxation; capital mobility;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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