Partisan Politics in Corporate Tax Competition

45 Pages Posted: 4 Feb 2010

See all articles by Steffen Osterloh

Steffen Osterloh

Center for European Economic Research (ZEW)

Marc Debus

University of Mannheim - Mannheim Centre for European Social Research (MZES)

Date Written: 2009

Abstract

The broad literature focussing on the effects of globalization and strategic interactions on corporate tax competition has widely neglected an impact of political factors. In this paper, we analyse the effects of political factors on corporate taxation and in particular the impact of partisanship. In a first step we show in a simple theoretical Zodrow/Mieszkowski-style framework how political ideologies can impact on decisions on corporate tax rates. Assuming heterogeneous decision-makers driven by self-interest in the political outcome and a probabilistic voting model, two channels can be identified which point at different tax reaction functions of left-wing and right-wing politicians: differences in public good preferences as well as ideological biases in the perception of capital mobility. Both channels imply that rightwing incumbents set lower corporate tax rates. In the empirical section we make use of highly sophisticated data on ideological positions. These are derived from the Comparative Manifesto Project (CMP) data set, which is based on the content analysis of party manifestos. This data enables much more sophisticated analyses of partisan politics than the data usually applied in public finance. Applying panel data for 32 European countries since 1979, we can detect a significant positive effect of left-wing legislatures on corporate tax rates. This effect, however, is diminishing over time. Beyond this ideological effect, we identify two further political factors which have interfered with the general pressure on cutting tax rates: the fragmentation of government, as well as the educational background of the respective head of government. Moreover, our analysis by means of disaggregated ideology measures reveals that especially the parties' attitude towards the welfare state is a most relevant factor which has a strong positive effect on corporate tax rates.

Keywords: company taxation, tax competition, political ideology, partisan politics

JEL Classification: H25, H87, D78

Suggested Citation

Osterloh, Steffen and Debus, Marc, Partisan Politics in Corporate Tax Competition (2009). ZEW - Centre for European Economic Research Discussion Paper No. 09-078, Available at SSRN: https://ssrn.com/abstract=1547052 or http://dx.doi.org/10.2139/ssrn.1547052

Steffen Osterloh (Contact Author)

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Marc Debus

University of Mannheim - Mannheim Centre for European Social Research (MZES) ( email )

Mannheim, 68131
Germany

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