Asymmetric Effects of Tax Competition on FDI vs. Budget Balance in European OECD Economies: Heterogeneous Panel Approach

Marina Beljić (), Olgica Glavaški, Emilija Beker Pucar, Stefan Stojkov and Jovica Pejčić
Additional contact information
Marina Beljić: Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia
Olgica Glavaški: Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia
Emilija Beker Pucar: Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia
Stefan Stojkov: Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia
Jovica Pejčić: Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia

Risks, 2023, vol. 11, issue 12, 1-18

Abstract: The global trends in taxation have generated a “race to the bottom” in capital income taxation, which is intended to be stopped by OECD through the introduction of a global minimum tax rate (15% of effective average tax rate—EATR). The question is whether the defined tax competition floor would have heterogeneous implications in different economies. The aim of this paper is to examine the long-term relationship between the EATR and FDI, and between the EATR and budget balance (BB) in European OECD economies in the period 1998–2021, using non-stationary, heterogeneous panels. According to the linear PMG model, a significant negative long-term relationship was revealed between the EATR and FDI and between the EATR and BB, while the error-correction parameters are significant and heterogeneous, showing that the speed of adjustments towards equilibrium is different across the analyzed economies. However, the nonlinear PMG results revealed asymmetry as the magnitude of the influence of an EATR reduction has a greater effect on FDI attraction and deficit deepening than an increase in the EATR on the opposite tendencies of FDI and deficit. Policymakers are facing a trade-off related to FDI attraction/budget deficit deepening when making decisions in relation to the EATR, and they are mostly oriented toward FDI inflow using EATR reduction in the analyzed economies.

Keywords: EATR; FDI; budget balance; PMG model; European OECD economies (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-9091/11/12/219/pdf (application/pdf)
https://www.mdpi.com/2227-9091/11/12/219/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:11:y:2023:i:12:p:219-:d:1300908

Access Statistics for this article

Risks is currently edited by Mr. Claude Zhang

More articles in Risks from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().