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

  • Harry Garretsen
  • Jolanda Peeters
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    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.

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    File URL: http://www.dnb.nl/binaries/Working%20Paper%20113-2006_tcm46-146770.pdf
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    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 113.

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    Date of creation: Sep 2006
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    Handle: RePEc:dnb:dnbwpp:113
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    Web page: http://www.dnb.nl/en/

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    1. 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.
    2. Brakman, Steven & Garretsen, Harry & Schramm, Marc, 2005. "Putting new economic geography to the test: free-ness of trade and agglomeration in the EU regions," CCSO Working Papers 200502, University of Groningen, CCSO Centre for Economic Research.
    3. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," Working Papers 9809, Business School - Economics, University of Glasgow.
    4. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    5. 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.
    6. Keith Head & Thierry Mayer, 2004. "The Empirics of Agglomeration and Trade," Sciences Po publications info:hdl:2441/10191, Sciences Po.
    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, June.
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