Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries?

Abstract:     
To what extent do countries' corporate income tax (CIT) rates attract foreign tax bases? What are the revenue implications of a unilateral tax reduction when tax bases are internationally mobile? These questions are explored using a panel of annual data from 17 OECD countries spanning the period 1982 to 2005. We find significant international fiscal externalities in the form of CIT-induced resource flows. The magnitude, however, indicates that the extent of international corporate tax base mobility is rather modest. Moreover, we find that, on average, a unilateral CIT reduction results in a less-than-proportional increase in the CIT base, thus reducing CIT revenues. The results are robust across a wide range of specifications and point to potential gains from international tax policy coordination.

Number of Pages in PDF File: 31

Keywords: tax competition, corporate income tax base elasticity, instrumental variables, international fiscal externalities, Laffer curve, panel data estimation

JEL Classification: H71, H77, H87, C23

working papers series