FDI Determination and Corporate Tax Competition in a Volatile World

37 Pages Posted: 26 Apr 2007

See all articles by Mauro Ghinamo

Mauro Ghinamo

University of Turin

Paolo M. Panteghini

Department of Economics and Management; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Federico Revelli

University of Turin

Date Written: April 2007

Abstract

This paper investigates the role of economic and political volatility in the process of corporate tax-rate determination. The article is based on a theoretical framework that allows for the ability of multinational firms to choose the optimal timing of foreign investment and to shift profits by transfer pricing, and provides an empirical analysis on a large panel data set of countries over the 1983-2003 period. First, a reduced-form dynamic equation of corporate tax rate determination is estimated by the generalised method of moments (GMM), where a country's top statutory corporate tax rate depends on a number of measures of economic and political volatility. The fundamental testable prediction derived from the theoretical model is that increased volatility should reduce a country's corporate tax rate. Our results support the hypothesis that economic volatility is associated with lower top statutory corporate tax rates, while our measures of political volatility have no significant impact on corporate taxation policy. In order to identify the channels through which volatility works, we also estimate a structural model allowing for simultaneous determination of the corporate tax rate and the inflow of FDI to a particular country. The estimates of the structural model show that economic volatility affects the corporate tax setting process through their impact on FDI inflow.

Keywords: foreign direct investment, tax competition, volatility

JEL Classification: C23, F23, H87

Suggested Citation

Ghinamo, Mauro and Panteghini, Paolo M. and Revelli, Federico, FDI Determination and Corporate Tax Competition in a Volatile World (April 2007). CESifo Working Paper Series No. 1965. Available at SSRN: https://ssrn.com/abstract=982792

Mauro Ghinamo

University of Turin

Via Po 53
10124 Torino
Italy

Paolo M. Panteghini (Contact Author)

Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Federico Revelli

University of Turin ( email )

Via Po 53
Facolta di Scienze Politiche
10124 Torino
Italy

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