Asymmetric Trade Estimator in Modified Gravity: Corporate Tax Rates and Trade in OECD Countries

Estelle Dauchy () and Christopher Balding ()
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Estelle Dauchy: New Economic School
Christopher Balding: Peking University HSBC Business School

No w0200, Working Papers from New Economic School (NES)

Abstract: To study the potentially distortionary impact of differing corporate income tax rates on international trade flows, we use an augmented empirical specification of the gravity model. Incorporating an asymmetric trade barrier measure into a modified gravity model, we capture the impact of corporate income tax rates via the price mechanism impact on trade. Holding other factors constant in a gravity model, one should theoretically expect asymmetric corporate income tax rates to impact bilateral trade flows. High (low) tax states have an implied price (dis)advantage relative to trade partners. However, gravity models have explicitly assumed that trade barriers are symmetric between countries. Using asymmetric trade barrier measures of corporate income tax rates differences between countries, we find that bilateral corporate income tax rates wedges do not impact bilateral international trade flows. Our empirical results are robust to alternative proxies for tax asymmetries and exclusion restrictions based on trade regions and time periods.

Keywords: Gravity; Asymmetric Barriers; Corporate Income Tax (search for similar items in EconPapers)
JEL-codes: F14 H25 H26 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2013-04
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