Technological Changes and Countries' Tax Policy Design

Abstract

We investigate whether technological changes predict tax policy changes in thirty-four OECD countries between 1996 and 2016. In addition to the statutory tax rate, we construct two new country-level indexes, one capturing a country’s tax-related investment incentives and one capturing its anti–tax avoidance rules. We show that after technological changes, countries tighten their anti–tax avoidance rules and reduce investment tax incentives. Technological changes do not contribute to the "race to the bottom" of statutory tax rates. Rather, cross-sectional tests show that smaller countries deviate from this general trend and apply less stringent anti–tax avoidance rules. In the competition for firms’ mobile capital, smaller countries thus appear to create indirect investment incentives by opting for less salient tax policy tools (i.e., less strict anti–tax avoidance rules). In contrast, countries facing high (tax) competition tighten their anti–tax avoidance rules to prevent the erosion of tax revenues.

Keywords: tax policy, technological changes, tax avoidance

JEL Classification: M48, H25, H26