Chasing the Firm or Rewarding the Partisans? Domestic Responses to International Tax Competition

Abstract

There is a growing literature in political science on how corporate tax cuts in one country can trigger competitive tax cuts in other countries. In this paper, we empirically estimate the determinants of corporate tax reductions in OECD countries using a Bayesian multilevel modeling approach that allows us to examine how domestic factors interact with global tax competition. Our findings suggest that while domestic politics can mitigate tax competition in some cases, it does not constrain domestic responses to tax competition enough to eliminate partisan differences. In fact, rather than make partisanship irrelevant, corporate tax competition seems to amplify the differences in the tax policy positions of left and right governments.