What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks*

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. , we analyze the role of economic and financial openness as well as tax competition while allowing for dynamic adjustment to shocks and period-specific as well as country-specific effects. While openness does not seem to be systematically related to corporate tax rates, our findings suggest that countries compete over statutory tax rates. In contrast, we do not find competition over effective marginal rates. While the short-run impact of tax competition on corporate tax rates seems to be modest, the interplay of tax competition and a sluggish adjustment of tax rates over time implies that permanent shocks to individual countries have substantial long-run effects on equilibrium tax levels in all countries. Terms of use: Documents inJEL Code: H20, H25, H71.

What drives the decreasing corporate tax rates? An empirical research on tax competition

“…This is tax competition in its most strategic sense and controlling for such effects might mitigate previously discussed effects on statutory tax rates, yet little research has been done on it. Examples include Devereux et al (2008) and Overesch and Rincke (2011). Both studies found significant evidence for strategic interactions to be pushing down corporate income tax rates.…”

“…This is the exact same weight function is that of Overesch and Rincke (2011), except for the fact that in this function the proxy for size is GDP (in billions) instead of population. The reasoning behind this is that countries will be more attentive of other countries if they boast more economic power.…”

“…Because of sluggish adjustment by national governments to the fiscal policy of their neighbors, permanent shocks constitute the factor that has a heavy influence on the determination of statutory corporate tax rates. A main factor that was however absent in the model of Overesch and Rincke (2011) was the level of economic integration of countries, a factor on which will be further elaborated in this research.…”

“…This research paper will attempt to answer that question by adopting a similar structure as that in Clausing (2007) and Overesch and Rincke (2011). The question will be empirically analysed by using a panel of the 34 OECD countries over the time span of 1981 till 2014.…”

“…As a result, long-run effects and permanent shocks cannot be appropriately addressed. Overesch and Rincke (2011) therefore expanded on models such as that of Devereux et al (2008). They do so by taking the lagged variable of the dependent variable in question, the statutory tax rate, and the lagged variable of the tax rates of neighboring countries.…”