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Corporate Taxation and International Competition

46 Pages Posted: 21 Mar 2006  

James R. Hines Jr.

University of Michigan; NBER

Date Written: July 2005

Abstract

Countries around the world continue to tax corporate income at significant rates despite downward pressures from international competition. Average statutory corporate income tax rates fell from 46 percent in 1982 to 33 percent in 1999, though tax bases simultaneously broadened, as a result of which average corporate tax collections actually rose from 2.1 percent of GDP in 1982 to 2.4 percent of GDP in 1999. Two pieces of evidence point to the possibility that mobile capital has received favorable tax treatment in recent years as a result of tax competition. The first is the experience of American multinational firms, whose average effective foreign tax rates fell from 43 percent in 1982 to 26 percent in 1999. The second is the cross-sectional pattern of tax rate-setting: small countries, facing elastic supplies of world capital, taxed corporate income at significantly lower rates than did larger countries in 1982. Corporate tax rates in 1999 did not substantially differ between small and large countries, implying that large countries set their tax rates in response to the same competitive pressures that small countries have always faced.

Keywords: corporate income tax, tax competition, multinational firms

JEL Classification: H25, H87

Suggested Citation

Hines Jr., James R., Corporate Taxation and International Competition (July 2005). Ross School of Business Paper No. 1026. Available at SSRN: https://ssrn.com/abstract=891233 or http://dx.doi.org/10.2139/ssrn.891233

James Rodger Hines (Contact Author)

University of Michigan ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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