IDEAS home Printed from https://ideas.repec.org/p/hhs/iuiwop/0942.html
   My bibliography  Save this paper

The Effect of Political and Economic Factors on Corporate Tax Rates

Author

Listed:
  • Hansson, Åsa

    (Research Institute of Industrial Economics (IFN))

  • Porter, Susan

    (McIntire School of Commerce)

  • Perry Williams, Susan

    (McIntire School of Commerce)

Abstract

Economists and political scientists have long been interested in factors that affect the statutory tax rate on businesses set by federal governments. In this study, we examine the impact of political and economic factors on several measures of tax rates and tax incentives offered across 19 developed countries for the years 1979 through 2005. Our results indicate that while economic conditions such as openness, strategic interaction, budget constraints, economic downturns and an aging population all influence the rate of tax set by governments, the political structure of the federal government has a significant impact in the form of economic stimulus given. Importantly, our results suggest that different economic and political structures affect the level of incentives offered beyond those factors that affect the level of tax rates. These results are relevant to the current tax debate facing many governments as they consider implementing new policies to attract foreign direct investment and retain and grow domestic business. The impact of the political structure on the ability to enact legislation is significant after controlling for economic factors. This indicates that as the marketplace continues to become more international, it will become increasingly important for governments to find opportunities to work within their systems to enact legislation that enables their business community to compete internationally.

Suggested Citation

  • Hansson, Åsa & Porter, Susan & Perry Williams, Susan, 2012. "The Effect of Political and Economic Factors on Corporate Tax Rates," Working Paper Series 942, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:0942
    as

    Download full text from publisher

    File URL: https://www.ifn.se/wfiles/wp/wp942.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Richard Baldwin & Rikard Forslid & Philippe Martin & Gianmarco Ottaviano & Frederic Robert-Nicoud, 2005. "Economic Geography and Public Policy," Economics Books, Princeton University Press, edition 1, number 7524.
    2. Mauro Ghinamo & Paolo Panteghini & Federico Revelli, 2010. "FDI determination and corporate tax competition in a volatile world," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(5), pages 532-555, October.
    3. Ronald B. Davies & Johannes Voget, 2008. "Tax competition in an expanding European Union," Working Papers 200904, School of Economics, University College Dublin.
    4. Thorsten Bayindir-Upmann, 1998. "Two Games of Interjurisdictional Competition When Local Governments Provide Industrial Public Goods," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 5(4), pages 471-487, October.
    5. James R. Hines Jr. & Lawrence H. Summers, 2009. "How Globalization Affects Tax Design," NBER Chapters, in: Tax Policy and the Economy, Volume 23, pages 123-157, National Bureau of Economic Research, Inc.
    6. Cassette, Aurélie & Paty, Sonia, 2008. "Tax competition among Eastern and Western European countries: With whom do countries compete?," Economic Systems, Elsevier, vol. 32(4), pages 307-325, December.
    7. Michela Redoano, 2007. "Fiscal Interactions Among European Countries. Does the EU Matter?," CESifo Working Paper Series 1952, CESifo.
    8. Peter Schwarz, 2007. "Does capital mobility reduce the corporate-labor tax ratio?," Public Choice, Springer, vol. 130(3), pages 363-380, March.
    9. John Ashworth & Bruno Heyndels, 2001. "Political Fragmentation and the Evolution of National Tax Structures in the OECD," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 377-393, August.
    10. 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.
    11. Ruiz, Fernando & Gerard, Marcel, 2008. "Is there evidence of strategic corporate tax interaction among EU countries?," MPRA Paper 10094, University Library of Munich, Germany.
    12. Dreher, Axel, 2006. "The influence of globalization on taxes and social policy: An empirical analysis for OECD countries," European Journal of Political Economy, Elsevier, vol. 22(1), pages 179-201, March.
    13. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
    14. Slemrod, Joel, 2004. "Are corporate tax rates, or countries, converging?," Journal of Public Economics, Elsevier, vol. 88(6), pages 1169-1186, June.
    15. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 269-304, June.
    16. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
    17. Rosanne Altshuler & Timothy J. Goodspeed, 2015. "Follow the Leader? Evidence on European and US Tax Competition," Public Finance Review, , vol. 43(4), pages 485-504, July.
    18. Keen, Michael & Marchand, Maurice, 1997. "Fiscal competition and the pattern of public spending," Journal of Public Economics, Elsevier, vol. 66(1), pages 33-53, October.
    19. Marcel Gérard & Fernando M.M. Ruiz, 2009. "Corporate Taxation and the Impact of Governance, Political and Economic Factors," CESifo Working Paper Series 2904, CESifo.
    20. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
    21. Signe Krogstrup, 2004. "Are Corporate Tax Burdens Racing to the Bottom in the European Union?," EPRU Working Paper Series 04-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    22. Huizinga, Harry & Laeven, Luc, 2008. "International profit shifting within multinationals: A multi-country perspective," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1164-1182, June.
    23. Basinger, Scott J. & Hallerberg, Mark, 2004. "Remodeling the Competition for Capital: How Domestic Politics Erases the Race to the Bottom," American Political Science Review, Cambridge University Press, vol. 98(2), pages 261-276, May.
    24. James Buchanan, 2008. "Same players, different game: how better rules make better politics," Constitutional Political Economy, Springer, vol. 19(3), pages 171-179, September.
    25. Crepaz, Markus M. L., 2002. "Duane Swank, Global Capital, Political Institutions, and Policy Change in Developed Welfare States. Cambridge University Press, Cambridge, 2002," Journal of Public Policy, Cambridge University Press, vol. 22(01), pages 101-106, January.
    26. Michael Overesch & Johannes Rincke, 2011. "What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(3), pages 579-602, September.
    27. Dani Rodrik, 1998. "Has Globalization Gone Too Far?," Challenge, Taylor & Francis Journals, vol. 41(2), pages 81-94, March.
    28. European Commission, 2001. "Annex to Company Taxation in the Internal Market," Taxation Studies 0006, Directorate General Taxation and Customs Union, European Commission.
    29. Swank,Duane, 2002. "Global Capital, Political Institutions, and Policy Change in Developed Welfare States," Cambridge Books, Cambridge University Press, number 9780521806688, September.
    30. Pantelis Kammas, 2011. "Strategic fiscal interaction among OECD countries," Public Choice, Springer, vol. 147(3), pages 459-480, June.
    31. James M. Buchanan, 2008. "Constitutional Political Economy," Springer Books, in: Readings in Public Choice and Constitutional Political Economy, chapter 17, pages 281-293, Springer.
    32. European Commission, 2001. "Company Taxation in the Internal Market," Taxation Studies 0005, Directorate General Taxation and Customs Union, European Commission.
    33. repec:taf:applec:45:y:2013:i:18:p:2653-2664 is not listed on IDEAS
    34. Pedro Gomes & Francois Pouget, 2008. "Corporate Tax Competition and the Decline of Public Investment," CESifo Working Paper Series 2384, CESifo.
    35. Ashworth, John & Heyndels, Bruno, 2002. "Tax Structure Turbulence in OECD Countries," Public Choice, Springer, vol. 111(3-4), pages 347-376, June.
    36. Sonia Paty & Aurélie Cassette, 2008. "Tax competition among Eastern and Western Europe: With whom do countries compete?," Post-Print halshs-00418868, HAL.
    37. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
    38. Swank,Duane, 2002. "Global Capital, Political Institutions, and Policy Change in Developed Welfare States," Cambridge Books, Cambridge University Press, number 9780521001441, September.
    39. Friedrich Heinemann & Michael Overesch & Johannes Rincke, 2010. "Rate‐Cutting Tax Reforms And Corporate Tax Competition In Europe," Economics and Politics, Wiley Blackwell, vol. 22(3), pages 498-518, November.
    40. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition [‘Do domestic firms benefit from direct foreign investment? Evidence from Venezuela’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(35), pages 449-495.
    41. Philipp Genschel & Achim Kemmerling & Eric Seils, 2011. "Accelerating Downhill: How the EU Shapes Corporate Tax Competition in the Single Market," Journal of Common Market Studies, Wiley Blackwell, vol. 49(3), pages 585-606, May.
    42. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
    43. Jan K. Brueckner, 2003. "Strategic Interaction Among Governments: An Overview of Empirical Studies," International Regional Science Review, , vol. 26(2), pages 175-188, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Åsa Hansson & Susan Porter & Susan Williams, 2015. "The importance of the political process on corporate tax policy," Constitutional Political Economy, Springer, vol. 26(3), pages 281-306, September.
    2. Michael P. Devereux & Simon Loretz, 2013. "What Do We Know About Corporate Tax Competition?," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(3), pages 745-774, September.
    3. Nelly Exbrayat, 2008. "The Impact of Trade Integration and Agglomeration Economies on Tax Interactions : Evidence from OECD Countries," Post-Print hal-00270067, HAL.
    4. Peter Schwarz, 2007. "Does capital mobility reduce the corporate-labor tax ratio?," Public Choice, Springer, vol. 130(3), pages 363-380, March.
    5. Pantelis Kammas, 2011. "Strategic fiscal interaction among OECD countries," Public Choice, Springer, vol. 147(3), pages 459-480, June.
    6. Markus Leibrecht & Claudia Hochgatterer, 2012. "Tax Competition As A Cause Of Falling Corporate Income Tax Rates: A Survey Of Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 26(4), pages 616-648, September.
    7. Hans Pitlik, 2005. "Folgt die Steuerpolitik in der EU der Logik des Steuerwettbewerbs," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 256/2005, Department of Economics, University of Hohenheim, Germany.
    8. Osterloh, Steffen & Debus, Marc, 2012. "Partisan politics in corporate taxation," European Journal of Political Economy, Elsevier, vol. 28(2), pages 192-207.
    9. Alexander Klemm & Stefan Parys, 2012. "Empirical evidence on the effects of tax incentives," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(3), pages 393-423, June.
    10. Heimberger, Philipp, 2021. "Corporate tax competition: A meta-analysis," European Journal of Political Economy, Elsevier, vol. 69(C).
    11. Ruiz, Fernando & Gerard, Marcel, 2008. "Is there evidence of strategic corporate tax interaction among EU countries?," MPRA Paper 10094, University Library of Munich, Germany.
    12. 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.
    13. Özlem Onaran & Valerie Boesch, 2014. "The Effect of Globalization on the Distribution of Taxes and Social Expenditures in Europe: Do Welfare State Regimes Matter?," Environment and Planning A, , vol. 46(2), pages 373-397, February.
    14. Adam, Antonis & Kammas, Pantelis & Lagou, Athina, 2013. "The effect of globalization on capital taxation: What have we learned after 20years of empirical studies?," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 199-209.
    15. Young Lee, 2020. "Competition in Corporate and Personal Income Tax: Evidence from 67 Developed and Developing Countries," Korean Economic Review, Korean Economic Association, vol. 36, pages 101-133.
    16. Hannes Winner, 2012. "Fiscal Competition and the Composition of Public Expenditure: An Empirical Study," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 6(3), September.
    17. Karen Crabbé, 2013. "Are Your Firm´s Taxes Set in Warsaw? Spatial Tax Competition in Europe," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(3), pages 317-337, September.
    18. 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.
    19. Osterloh, Steffen & Debus, Marc, 2009. "Partisan politics in corporate tax competition," ZEW Discussion Papers 09-078, ZEW - Leibniz Centre for European Economic Research.
    20. Yongzheng Liu, 2016. "Do government preferences matter for tax competition?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(2), pages 343-367, April.

    More about this item

    Keywords

    Corporate tax rates; Tax competition; Political structure;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:iuiwop:0942. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Elisabeth Gustafsson (email available below). General contact details of provider: https://edirc.repec.org/data/iuiiise.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.