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Trade Integration and Business Tax Differentials: Theory and Evidence from OECD Countries

Author

Listed:
  • Nelly Exbrayat

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - Université de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

  • Benny Geys

    (BI Norwegian School of Management - BI Norwegian School of Management)

Abstract

Building on recent contributions to the New Economic Geography literature, this paper analyses the relation between asymmetric market size, trade integration and business income tax differentials across countries. First, relying on a foot-loose capital model of tax competition, we illustrate that trade integration (or decreasing trade costs) reduces the importance of relative market size for differences in the extent of corporate taxation between countries. Then, using a dataset of 26 OECD countries over the period 1982-2004, we provide supportive evidence of these theoretical predictions: i.e., market size differences are strongly positively correlated with corporate income tax differences across countries but, crucially, trade integration weakens this link. These findings are obtained controlling for the potential endogeneity of trade integration and are robust to various alternative specifications and robustness checks.

Suggested Citation

  • Nelly Exbrayat & Benny Geys, 2012. "Trade Integration and Business Tax Differentials: Theory and Evidence from OECD Countries," Post-Print halshs-00758078, HAL.
    • Handle: RePEc:hal:journl:halshs-00758078
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    Cited by:

    1. Nelly Exbrayat & Benny Geys, 2014. "Trade integration and corporate income tax differentials," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(2), pages 298-323, April.

    More about this item

    Keywords

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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