Trade Integration and Business Tax Differentials: Theory and Evidence from OECD Countries

Nelly Exbrayat () and Benny Geys
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Nelly Exbrayat: Université de Lyon, Lyon, F-69003, France ; Université Jean Monnet, Saint-Etienne, F-42000, France ; CNRS, GATE Lyon St Etienne, Saint-Etienne, F-42000, France

No 1123, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: Building on recent contributions to the New Economic Geography literature, this paper analyses the relation between asymmetric market size, trade integration and business income tax differentials across countries. First, relying on a foot-loose capital model of tax competition, we illustrate that trade integration (or decreasing trade costs) reduces the importance of relative market size for differences in the extent of corporate taxation between countries. Then, using a dataset of 26 OECD countries over the period 1982-2004, we provide supportive evidence of these theoretical predictions : i.e., market size differences are strongly positively correlated with corporate income tax differences across countries but, crucially, trade integration weakens this link. These findings are obtained controlling for the potential endogeneity of trade integration and are robust to various alternative specifications and robustness checks.

Keywords: Tax competition; Trade integration; New Economic Geography; Tax differentials (search for similar items in EconPapers)
JEL-codes: C23 F12 H2 H3 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-acc, nep-int and nep-pbe
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ftp://ftp.gate.cnrs.fr/RePEc/2011/1123.pdf (application/pdf)

Related works:
Working Paper: Trade Integration and Business Tax Differentials: Theory and Evidence from OECD Countries (2012)
Working Paper: Trade Integration and Business Tax Differentials: Theory and Evidence from OECD Countries (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:1123

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