Does trade liberalization trigger tax competition? Theory and evidence from OECD countries

Nelly Exbrayat (nelly.exbrayat@univ-st-etienne.fr)
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Nelly Exbrayat: Université de Lyon, Lyon F- 69007, France; CNRS, GATE L-SE, Ecully, F- 69130, France; Université J. Monnet, Saint-Etienne, F- 42000, France

No 1620, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: This article 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 liberalization 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.

Keywords: Tax competition; new economic geography; panel data; trade integration; market potential (search for similar items in EconPapers)
JEL-codes: C23 F12 H2 H3 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-geo, nep-int and nep-pbe
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:1620

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