Country Size and Corporate Tax Rate: Rationale and Empirics

31 Pages Posted: 4 Sep 2015

See all articles by Céline Azémar

Céline Azémar

University of Glasgow

Rodolphe Desbordes

SKEMA Business School

Ian Wooton

University of Strathclyde - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2015

Abstract

This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member-states for the period 1981-2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.

Keywords: corporate tax rate, country size, foreign direct investment, tax competition

JEL Classification: E62, F23, H25

Suggested Citation

Azémar, Céline and Desbordes, Rodolphe and Wooton, Ian, Country Size and Corporate Tax Rate: Rationale and Empirics (August 2015). CEPR Discussion Paper No. DP10800, Available at SSRN: https://ssrn.com/abstract=2655486

Céline Azémar (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Rodolphe Desbordes

SKEMA Business School ( email )

Lille
France

Ian Wooton

University of Strathclyde - Department of Economics ( email )

Sir William Duncan Building
130 Rottenrow
Glasgow G4 0GE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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