Country Size and Corporate Tax Rate: Rationale and Empirics

Ian Wooton (), Rodolphe Desbordes and Azémar, Céline

No 10800, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member-states for the period 1981-2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.

Keywords: Corporate tax rate; Country size; Foreign direct investment; Tax competition (search for similar items in EconPapers)
JEL-codes: E62 F23 H25 (search for similar items in EconPapers)
Date: 2015-08
New Economics Papers: this item is included in nep-acc, nep-eec, nep-eur and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Country Size and Corporate Tax Rate: Rationale and Empirics (2015)
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