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Tax Rate and Tax Base Competition for Foreign Direct Investment

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  • Peter Egger
  • Horst Raff

Abstract

This paper argues that the large reduction in corporate tax rates and only gradual widening of tax bases in many countries over the last decades are consistent with tougher international competition for foreign direct investment (FDI). To make this point we develop a model in which governments compete for FDI using corporate tax rates and tax bases. The model’s predictions regarding the slope of policy reaction functions and the response of equilibrium tax parameters to trade costs and market size are shown to be consistent with panel data for 43 developed countries and emerging markets. Using estimated policy reaction functions we simulate the effect of regional trade integration and find that this integration has contributed significantly to the observed fall in corporate tax rates.

Suggested Citation

  • Peter Egger & Horst Raff, 2011. "Tax Rate and Tax Base Competition for Foreign Direct Investment," CESifo Working Paper Series 3596, CESifo.
    • Handle: RePEc:ces:ceswps:_3596
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    3. Sijbren Cnossen, 2018. "Corporation taxes in the European Union: Slowly moving toward comprehensive business income taxation?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(3), pages 808-840, June.
    4. Zareh Asatryan & Annika Havlik & Frank Streif, 2017. "Vetoing and inaugurating policy like others do: evidence on spatial interactions in voter initiatives," Public Choice, Springer, vol. 172(3), pages 525-544, September.
    5. Valeria Merlo & Andreas Schanbacher & Georg U. Thunecke & Georg Wamser, 2023. "Identifying Tax-Setting Responses from Local Fiscal Policy Programs," CESifo Working Paper Series 10473, CESifo.
    6. Giuseppe Liddo & Alessandro Rubino & Ernesto Somma, 2019. "Determinants of PPP in infrastructure investments in MENA countries: a focus on energy," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 46(4), pages 523-580, December.
    7. Amendolagine, Vito & Bruno, Randolph Luca & Cipollina, Maria & De Pascale, Gianluigi, 2023. "Minimum Global Tax: Winners and Losers in the Race for Mergers and Acquisitions," IZA Discussion Papers 16144, Institute of Labor Economics (IZA).
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    9. Fernández-Rodríguez, Elena & García-Fernández, Roberto & Martínez-Arias, Antonio, 2023. "Institutional determinants of the effective tax rate in G7 and BRIC countries," Economic Systems, Elsevier, vol. 47(2).
    10. Delgado, Francisco J. & Fernández-Rodríguez, Elena & Martínez-Arias, Antonio & Presno, Maria J., 2019. "Club convergence in the corporate income tax: The case of European effective rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 942-953.
    11. Rosella Levaggi & Paolo M. Panteghini, 2021. "Public expenditure spillovers: an explanation for heterogeneous tax reaction functions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(3), pages 497-514, June.
    12. Bräutigam, Rainer & Spengel, Christoph & Stutzenberger, Kathrin, 2017. "The development of corporate tax structures in the European Union from 1998 to 2015 - Qualitative and quantitative analysis," ZEW Discussion Papers 17-034, ZEW - Leibniz Centre for European Economic Research.
    13. Christian Reiner, 2022. "It's the End of Globalization as We Know It! Zeitgemaesse Betrachtungen zur politischen Oekonomik der Globalisierungskrise," ICAE Working Papers 141, Johannes Kepler University, Institute for Comprehensive Analysis of the Economy.
    14. Heimberger, Philipp, 2021. "Corporate tax competition: A meta-analysis," European Journal of Political Economy, Elsevier, vol. 69(C).
    15. Streif, Frank, 2015. "Tax competition in Europe: Europe in competition with other world regions?," ZEW Discussion Papers 15-082, ZEW - Leibniz Centre for European Economic Research.
    16. Harald Badinger & Peter Egger, 2008. "GM Estimation of Higher-Order Spatial Autoregressive Processes in Cross-Section Models with Heteroskedastic Disturbances," CESifo Working Paper Series 2356, CESifo.
    17. Miniaci Raffaele & Panteghini Paolo M. & Rivolta Giulia, 2022. "The estimation of reaction functions under tax competition," German Economic Review, De Gruyter, vol. 23(2), pages 301-339, May.
    18. Kunka Petkova & Alfons J. Weichenrieder, 2020. "The relevance of depreciation allowances as a fiscal policy instrument: A hybrid approach to CCCTB?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(3), pages 579-610, August.
    19. Caterina Liesegang & Marco Runkel, 2018. "Tax competition and fiscal equalization under corporate income taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 311-324, April.
    20. Georg U. Thunecke, 2023. "Are Consumers Paying the Bill? How International Tax Competition Affects Consumption Taxation," Working Papers tax-mpg-rps-2023-26, Max Planck Institute for Tax Law and Public Finance.

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    More about this item

    Keywords

    corporate taxes; tax competition; foreign direct investment; multinational firms; free-trade areas; regional integration;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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