What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks

24 Pages Posted: 24 Aug 2011

See all articles by Michael Overesch

Michael Overesch

Universität zu Köln

Johannes Rincke

Ludwig Maximilian University of Munich (LMU); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2011

Abstract

We reassess the driving forces behind the recent decline of corporate tax rates in Europe. Using data for up to 32 countries from 1983 to 2006, we analyze the roles of economic and financial openness as well as tax competition, while allowing for dynamic adjustment to shocks and period‐specific and country‐specific effects. While there is no evidence that countries that have become more open have reduced their tax rates more, our findings suggest that countries strongly compete over statutory tax rates. A simulation of tax rates in a scenario with no cross‐sectional dependence in tax setting suggests that, in the absence of tax competition, the mean statutory tax rate of Western European countries in 2006 would have been about 12.5 percentage points above its actual level. We conclude that the recent downward trend in corporate taxes is mainly a result of tax competition.

Keywords: Corporate taxes, tax competition, openness

JEL Classification: H2, H25, H71

Suggested Citation

Overesch, Michael and Rincke, Johannes, What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks (September 2011). The Scandinavian Journal of Economics, Vol. 113, Issue 3, pp. 579-602, 2011. Available at SSRN: https://ssrn.com/abstract=1915845 or http://dx.doi.org/10.1111/j.1467-9442.2011.01650.x

Michael Overesch (Contact Author)

Universität zu Köln ( email )

Albertus-Magnus-Platz
WiSo-Gebäude
Cologne, 50923
Germany
0221/470-5605 (Phone)

HOME PAGE: http://www.steuer.uni-koeln.de/

Johannes Rincke

Ludwig Maximilian University of Munich (LMU) ( email )

Seminar for Economic Policy
Akademiestr. 1/II
Munich, D-80799
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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