Tax rate and tax base competition for foreign direct investment

Peter Egger and Horst Raff

International Tax and Public Finance, 2015, vol. 22, issue 5, 777-810

Abstract: This paper examines empirically whether governments behave strategically when setting corporate tax rates and tax bases, and—if so—how they react to changes in other countries’ tax rates and bases. Specifically, we estimate the slopes of tax policy reaction functions and examine how marginal changes in trade costs and GDP affect tax policies in the Nash equilibrium. The estimated slopes and comparative static effects can be rationalized in a model in which governments compete for foreign direct investment (FDI). Using estimated policy reaction functions, we demonstrate that observed changes in corporate tax systems are consistent with tougher competition for FDI following regional trade integration. Copyright Springer Science+Business Media New York 2015

Keywords: Corporate taxes; Tax competition; Foreign direct investment; Multinational firms; Free-trade areas; Regional integration; F15; F23; H20; H25 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (20)

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Related works:
Working Paper: Tax Rate and Tax Base Competition for Foreign Direct Investment (2011)
Working Paper: Tax rate and tax base competition for foreign direct investment (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:22:y:2015:i:5:p:777-810

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DOI: 10.1007/s10797-014-9305-4

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