Does Trade Liberalisation Trigger Tax Competition? Theory and Evidence from OECD Countries

28 Pages Posted: 15 Jan 2017

See all articles by Nelly Exbrayat

Nelly Exbrayat

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Date Written: January 2017

Abstract

This paper aims at assessing the empirical relevance of new economic geography models of tax competition. We rely on a simple model to specify tax reactions functions, which we estimate with a panel covering (up to) 26 OECD countries over the period 1982 to 2006. We provide striking support for the two main predictions regarding the slope and the constant of the reaction function: national governments seem to adjust their corporate tax rate towards the level chosen in countries that are more populated, and they tend to set higher corporate tax rates when their country enjoys a high real market potential. Through the latter effect, trade integration exerts a positive influence on the level of corporate taxation. However, using a theoretically grounded index of bilateral trade integration, we also show that trade liberalisation gives rise to significant tax interactions in the setting of effective average tax rates in the case of European countries, thus exerting a downward pressure on corporate tax rates.

Suggested Citation

Exbrayat, Nelly, Does Trade Liberalisation Trigger Tax Competition? Theory and Evidence from OECD Countries (January 2017). The World Economy, Vol. 40, Issue 1, pp. 88-115, 2017, Available at SSRN: https://ssrn.com/abstract=2899181 or http://dx.doi.org/10.1111/twec.12405

Nelly Exbrayat (Contact Author)

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

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