The Economic Consequences of Corporate Tax Rates Reductions in the EU: Evidence Using a Computable General Equilibrium Model

28 Pages Posted: 7 Mar 2019

See all articles by Maria Alvarez-Martinez

Maria Alvarez-Martinez

European Union - European Commission

Salvador Barrios

European Commission, JRC - IPTS

Diego d'Andria

Joint Research Center of the European Commission

Maria Gesualdo

Joint Research Centre - European Commission

Dimitrios Pontikakis

Universidad Loyola Andalucía

Jonathan Pycroft

European Union - European Commission

Date Written: March 2019

Abstract

In a globalised world, governments are eager to attract foreign investors by lowering corporate tax rates. Recent trends point towards a revival of a race to the bottom in corporate income tax (CIT) rates in developed economies. EU countries have been active in this respect. A generalised fall in CIT rate could prove detrimental to tax revenues and trigger increase in other taxes to meet fiscal policy objectives. However, it could also spur investment and growth and prove to be a good fiscal policy strategy if, as a result, the corporate tax base increases. The final economic and fiscal impact of a reduction in CIT rates is therefore unclear. Using a CGE model, we find that uncoordinated tax reforms significantly impact national economies and third‐country effects can be significant when large countries implement CIT rate cuts. Small countries are better off unilaterally reducing their CIT rate at the expense of other EU countries. We find that negative spillovers are mitigated when the country reducing its CIT rate restores its budget balance by cutting either public expenditures or social transfers. A larger degree of non‐EU capital mobility also tends to reduce the negative spillover effects of unilateral CIT rate reductions.

Keywords: computable general equilibrium models, corporate taxation, European Union

Suggested Citation

Alvarez-Martinez, Maria and Barrios, Salvador and d'Andria, Diego and Gesualdo, Maria and Pontikakis, Dimitrios and Pycroft, Jonathan, The Economic Consequences of Corporate Tax Rates Reductions in the EU: Evidence Using a Computable General Equilibrium Model (March 2019). The World Economy, Vol. 42, Issue 3, pp. 818-845, 2019, Available at SSRN: https://ssrn.com/abstract=3348003 or http://dx.doi.org/10.1111/twec.12703

Maria Alvarez-Martinez (Contact Author)

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Salvador Barrios

European Commission, JRC - IPTS ( email )

Edificio Expo
C/ Inca Garcilaso s/n
Seville, 41092
Spain
34 954 48 82 08 (Phone)
34 954 48 82 08 (Fax)

Diego D'Andria

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
1049
Belgium

Maria Gesualdo

Joint Research Centre - European Commission ( email )

Dimitrios Pontikakis

Universidad Loyola Andalucía

c/ Escritor Castilla Aguayo
Córdoba, 14004
Spain

Jonathan Pycroft

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

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