Tax competition in the eurozone: Capital mobility, agglomeration, and the small country disadvantage
The increasing economic integration among OECD countries since the late 1970s has attracted much attention in tax policy research. Although several studies have tested whether capital mobility induces a race to the bottom in capital taxation, the two approaches - competition and compensation theory - provide diametrically opposed answers to this question. One theory predicts a reduction in taxation, the other a stagnation or increase in taxation. This paper examines the question once again. However, instead of aggregating all OECD countries into one sample, it compares EMU countries - with nearly perfect capital mobility - to non-EMU countries in a difference-in- differences regression. Controlling for market size, I found that the EMU led to a divergence in taxation for small and large countries. Although the reduction in small countries could be explained by competition theory, the increase in large countries is not in line with the conventional theories. I argue that agglomeration forces give large countries an advantage in terms of attracting foreign direct investment (FDI) because of beneficial supply and demand chains. Small countries are disadvantaged in terms of capital attraction, which they counter by reducing capital taxation.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: Paulstr. 3, 50676 Köln|
Phone: + 49 (0) 221-2767-0
Web page: http://www.mpifg.de/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
- Marius Brülhart & Mario Jametti & Kurt Schmidheiny, 2012.
"Do agglomeration economies reduce the sensitivity of firm location to tax differentials?,"
Royal Economic Society, vol. 122(563), pages 1069-1093, 09.
- Marius BRÜLHART & Mario JAMETTI & Kurt SCHMIDHEINY, 2007. "Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 07.13, Université de Lausanne, Faculté des HEC, DEEP.
- Marius Brülhart & Mario Jametti & Kurt Schmidheiny, 2007. "Do agglomeration economies reduce the sensitivity of firm location to tax differentials?," Economics Working Papers 1062, Department of Economics and Business, Universitat Pompeu Fabra.
- Brülhart, Marius & Jametti, Mario & Schmidheiny, Kurt, 2007. "Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials?," CEPR Discussion Papers 6606, C.E.P.R. Discussion Papers.
- Mario Jametti & Marius Brülhart & Kurt Schmidheiny, 2007. "Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials?," Working Papers 2007_9, York University, Department of Economics.
- Barro, Robert J, 1990.
"Government Spending in a Simple Model of Endogenous Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 98(5), pages S103-26, October.
- Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
- Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
- Petroulas, Pavlos, 2004.
"The Effect of the Euro on Foreign Direct Investment,"
Research Papers in Economics
2004:5, Stockholm University, Department of Economics.
- Petroulas, Pavlos, 2007. "The effect of the euro on foreign direct investment," European Economic Review, Elsevier, vol. 51(6), pages 1468-1491, August.
- Pavlos Petroulas, 2006. "The Effect of the Euro on Foreign Direct Investment," Working Papers 48, Bank of Greece.
- Dixit, Avinash K & Stiglitz, Joseph E, 1977.
"Monopolistic Competition and Optimum Product Diversity,"
American Economic Review,
American Economic Association, vol. 67(3), pages 297-308, June.
- Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
- Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002.
"How Much Should We Trust Differences-in-Differences Estimates?,"
NBER Working Papers
8841, National Bureau of Economic Research, Inc.
- Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 249-275.
- Hannes Winner, 2005. "Has Tax Competition Emerged in OECD Countries? Evidence from Panel Data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(5), pages 667-687, September.
- Bretschger, Lucas & Hettich, Frank, 2002.
"Globalisation, capital mobility and tax competition: theory and evidence for OECD countries,"
European Journal of Political Economy,
Elsevier, vol. 18(4), pages 695-716, November.
- Bretschger, Lucas & Hettich, Frank, 2000. "Globalisation, capital mobility and tax competition: Theory and evidence for OECD countries," Wirtschaftswissenschaftliche Diskussionspapiere 07/2000, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
- Forslid, Rikard & Andersson, Fredrik, 1999.
"Tax Competition and Economic Geography,"
Research Papers in Economics
2000:5, Stockholm University, Department of Economics.
- Andersson, Fredrik & Forslid, Rikard, 1999. "Tax Competition and Economic Geography," CEPR Discussion Papers 2220, C.E.P.R. Discussion Papers.
- Fredrik Andersson & Rikard Forslid, 2000. "Tax Competition and Economic Geography," Econometric Society World Congress 2000 Contributed Papers 1356, Econometric Society.
- Garrett, Geoffrey, 1995. "Capital mobility, trade, and the domestic politics of economic policy," International Organization, Cambridge University Press, vol. 49(04), pages 657-687, September.
- Dani Rodrik, 1997. "Trade, Social Insurance, and the Limits to Globalization," NBER Working Papers 5905, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:zbw:mpifgd:1313. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.