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

31 Pages Posted: 1 Jul 2009

See all articles by Aleksandra Riedl

Aleksandra Riedl

Vienna University of Economics and BA - Institute for Economic Geography and GIScience

Silvia Rocha-Akis

WIFO

Date Written: June 2009

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.

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

JEL Classification: H71, H77, H87, C23

Suggested Citation

Riedl, Aleksandra and Rocha-Akis, Silvia, Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries? (June 2009). CESifo Working Paper Series No. 2669. Available at SSRN: https://ssrn.com/abstract=1423748

Aleksandra Riedl

Vienna University of Economics and BA - Institute for Economic Geography and GIScience ( email )

Nordbergstra├če 15
A-1090 Wien
Austria

Silvia Rocha-Akis (Contact Author)

WIFO ( email )

P.O. Box 91
Wien, A-1103
Austria

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