Corporate Tax Competition and Public Capital Stock

Pedro Gomes and François Pouget

STICERD - Distributional Analysis Research Programme Papers from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: This paper argues that the governmental decisions on corporate tax and public capital stock are not independent. In order to explain this relationship, we have built a general equilibrium model of corporate tax competition where governments supply public capital and compete for corporate profits. When international tax competition drives the statutory tax rate down from 50% to 30%, public capital stock goes down by 10% of GDP. To confirm this relation, we estimate two policy functions for 18 OECD countries. We find that corporate tax rate and public investment are endogenous and that a decline of 20% in the corporate tax rate, driven by competition, reduces public investment by 0.5% to 0.9% of GDP. We also find evidence that there is international competition in both policy tools and that tax competition increases with the degree of openness of the economy.

Date: 2008-03
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Related works:
Working Paper: Corporate tax competition and public capital stock (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:stidar:096

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