Economic Freedom and Taxation: Is There a Trade-off in the Locational Competition Between Countries?

Peter Egger and Hannes Winner

Public Choice, 2004, vol. 118, issue 3_4, 288 pages

Abstract: This paper investigates the relationship between economic freedom and taxation. We argue that an economically free environment improves the attractiveness of a location, which, in turn, enables governments to levy higher business taxes. To test this hypothesis empirically, we estimate the impact of economic freedom on the national tax policy, where the latter is measured by the corporate tax revenue related to GNP (corporate tax ratio). We utilize a data set of 46 developed and less developed countries between 1980 and 1997 and find a clear confirmation of our hypothesis. Further, a simulation analysis reveals that the observed change in economic freedom has equalized the international distribution of corporate tax ratios.

Date: 2004
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