Kiel Working Papers, Kiel Institute for World Economics
No 1734:
Tax Rate and Tax Base Competition for Foreign Direct Investment
Peter Egger and 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
Keywords: corporate taxes; tax competition; foreign direct investment; multinational firms; free-trade areas; regional integration; (follow links to similar papers)
JEL-Codes: F15,; F23,; H20,; H25; (follow links to similar papers)
50 pages, September 2011
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