Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries?

Aleksandra Riedl () and Silvia Rocha-Akis

No 2669, CESifo Working Paper Series from CESifo

Abstract: To what extent do countries' corporate income tax (CIT) rates attract foreign tax bases? What are the revenue implications of a unilateral tax reduction when tax bases are internationally mobile? These questions are explored using a panel of annual data from 17 OECD countries spanning the period 1982 to 2005. We find significant international fiscal externalities in the form of CIT-induced resource flows. The magnitude, however, indicates that the extent of international corporate tax base mobility is rather modest. Moreover, we find that, on average, a unilateral CIT reduction results in a less-than-proportional increase in the CIT base, thus reducing CIT revenues. The results are robust across a wide range of specifications and point to potential gains from international tax policy coordination.

Keywords: tax competition; corporate income tax base elasticity; instrumental variables; international fiscal externalities; Laffer curve; panel data estimation (search for similar items in EconPapers)
JEL-codes: C23 H71 H77 H87 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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