How big are strategic spillovers from corporate tax competition?

Abstract

Strategic spillovers happen when one country's tax rate responds to tax cuts in other countries. My estimate of the size of strategic spillovers from corporate tax competition is one‐third of the size of consensus estimates. A one percentage point cut in the foreign tax rate results in a 0.23 percentage point cut in the home tax rate. I use two novel identification strategies. First, I use bilateral foreign investment to define how one country matters to another. Second, I use only tax reforms—359 reforms across 76 countries. These identification strategies are derived from a model of corporate tax competition.

Revenue losses from corporate tax avoidance: Estimations from the UNUWIDER Government Revenue Dataset

“…Using more recent data and focusing on the totality of non-OECD countries, Crivelli et al (2016) estimate strategic spillovers ranging between 3% and 7% but highlight the uncertainty over these measures given the lack of data for developing countries. Finally, Naitram (2022) utilises the most recent data available and develops a model using the bilateral foreign investments between countries and the number of tax reforms occurring in each country over a number of years. The results suggest a correlation between a tax reform occurring in one country and the will of that country's government to adapt its system to the current tax competition so as to attract more FDI (Naitram, 2022).…”

“…With regard to research on strategic spillovers, four studies are noteworthy: Devereux et al (2008), Klemm and Van Parys (2012), Crivelli et al (2016), and Naitram (2022). Except for Crivelli et al (2016) and Klemm and Van Parys (2012), the others concentrate on the OECD area, leaving out the effects on low‐income countries.…”

“…Finally, Naitram (2022) utilises the most recent data available and develops a model using the bilateral foreign investments between countries and the number of tax reforms occurring in each country over a number of years. The results suggest a correlation between a tax reform occurring in one country and the will of that country's government to adapt its system to the current tax competition so as to attract more FDI (Naitram, 2022).…”