This paper tests whether OECD countries compete with each other over corporate taxes in order to attract investment. We develop two models: with …rm mobility, countries compete only over the statutory tax rate or the e¤ective average tax rate, while with capital mobility, countries compete only over the e¤ective marginal tax rate. We estimate the parameters of reaction functions using data from 21 countries between 1983 and 1999. We …nd evidence that countries compete over all three measures, but particularly over the statutory tax rate and the e¤ective average tax rate. This is consistent with a belief amongst governments that location choices by multinational …rms are discrete. We also …nd evidence of concave reaction functions, consistent with the model outlined in the paper.Keywords: tax competition, corporate taxes, e¤ective average tax rate, e¤ective marginal tax rate. JEL Classi…cation Numbers: H0, H25, H77¤ The research reported here received …nancial support from the ESRC, and from the CSGR at Warwick University. We would like to thank Rachel Gri¢th and Lucy Chennells for help in assembling corporate tax data. We would also like to thank participants at the World Tax Competition conference at the IFS, the conference on Strategic Interaction among Local Governments at the Catholic University of Milan, the Workshop on Taxation and Public Debt at the University of Warwick's London O¢ce, and seminar participants at EPRU, University of Copenhagen, and the Universities of Exeter, Edinburgh, Keele, Oslo, Newcastle and Warwick for helpful comments. Non-Technical SummaryStatutory rates of corporation tax in developed countries have fallen substantially over the last two decades. The average rate amongst OECD countries in the early 1980s was nearly 50%; by 2001 this had fallen to under 35%. It is commonly believed that the reason for these declining rates is a process of tax competition: countries compete with each other by reducing their tax rates on corporate profit in order to attract inward flows of capital. Such a belief has led to increasing international coordination in an attempt to maintain revenue from corporation taxes. Both the European Union and the OECD introduced initiatives in the late 1990s designed to combat what they see as ''harmful'' tax competition. This paper examines whether there is any empirical evidence for such international competition in taxes on corporate income. Part of the reason for the lack of empirical work in this area to date is the difficulty in developing appropriate measure of taxation. Although there have been striking changes to statutory tax rates, there have also been important changes to the definitions of tax bases; broadly, tax bases have been broadened as tax rates have fallen.The corresponding drawback of most existing theory is that it does not adequately deal with the fact that governments have two broad instruments for determining corporate income taxes: the rate and the base. Almost exclusively, theoretical models combine this into a single ''effective...
This paper analyses the development of taxes on corporate income in EU and G7 countries over the last two decades. We establish a number of stylised facts about their development. Tax-cutting and base-broadening reforms have had the effect that, on average across EU and G7 countries, effective tax rates on marginal investment have remained fairly stable, but those on more profitable investments have fallen. We discuss two possible explanations of these stylised facts arising from alternative forms of tax competition. First, governments may be responding to a fall in the cost of income shifting, which puts downward pressure on the statutory tax rate. Second, reforms are consistent with competition for more profitable projects, in particular those earned by multinational firms.
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