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Does trade liberalization trigger tax competition? Theory and evidence from OECD countries

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  • Nelly Exbrayat

    (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon)

Abstract

This article aims at assessing the empirical relevance of New Economic Geography models of tax competition. We rely on a simple model to specify tax reactions functions, which we estimate with a panel covering (up to) 26 OECD countries over the period 1982 to 2006. We provide striking support for the two main predictions regarding the slope and the constant of the reaction function: national governments seem to adjust their corporate tax rate towards the level chosen in countries that are more populated, and they tend to set higher corporate tax rates when their country enjoys a high real market potential. Through the latter effect, trade integration exerts a positive influence on the level of corporate taxation. However, using a theoretically grounded index of bilateral trade integration, we also show that trade liberalization gives rise to significant tax interactions in the setting of effective average tax rates in the case of European countries, thus exerting a downward pressure on corporate tax rates.

Suggested Citation

  • Nelly Exbrayat, 2016. "Does trade liberalization trigger tax competition? Theory and evidence from OECD countries," Working Papers halshs-01328769, HAL.
  • Handle: RePEc:hal:wpaper:halshs-01328769
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01328769
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    References listed on IDEAS

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    Cited by:

    1. Fabien Candau & Jacques Le Cacheux, 2017. "Corporate Income Tax as a Genuine Own Resource," Post-Print hal-02633862, HAL.

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    Keywords

    Tax competition; new economic geography; panel data; trade integration; market potential;

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