scholarly journals What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks

2009 ◽  
Author(s):  
Michael Overesch ◽  
Johannes Rincke
Keyword(s):  
Tax Competition ◽  
Tax Rates ◽  
Dynamic Adjustment ◽  
Corporate Tax ◽  
Corporate Tax Rates

Can tax competition boost demand? Causes and consequences of the global race to the bottom in corporate tax rates

2020 ◽  
Vol 8 (4) ◽  
pp. 512-535
Author(s):  
Ryan Woodgate
Keyword(s):  
Tax Competition ◽  
Multinational Enterprises ◽  
Corporate Taxes ◽  
Tax Rates ◽  
Corporate Tax ◽  
Coordination Problem ◽  
Race To The Bottom ◽  
Corporate Tax Rates ◽  
Negative Effect ◽  
Do So

Corporate tax rates have been consistently falling around the world for decades now. This paper aims to explain the causes and consequences of this ‘global race to the bottom’. In particular, the author wishes to test the hypothesis that this race to the bottom is driven by demand-boosting corporate tax competition, where, contrary to traditional Kaleckian theory, lower corporate taxes may positively affect demand through increased investment due to multinational enterprises (MNEs) that seek higher net profits through (re)locating in low-tax jurisdictions. In order to do so, the author builds a general theory of the effect of average effective corporate tax rates (AECTRs) on MNE location. This theory is used to justify the addition of a tax-sensitive foreign direct investment channel in the investment function of a canonical Kaleckian model. As a result, this paper determines the conditions under which a country may be ‘tax-competition-led’, where lowering AECTRs increases demand through increased MNE investment and in spite of the negative effect on government expenditure given a balanced budget. The findings of this paper are that it is possible for an economy to be tax-competition-led, though it is unlikely in many cases given the existence of a coordination problem that lessens or nullifies the effect of lowering AECTRs when many countries do so simultaneously. The author refers to this problem as the ‘paradox of tax competition’, since, like other fallacies of composition commonly identified in Post-Keynesian thought, this is a phenomenon where the benefits of one country acting alone are reduced or eliminated if other countries act the same way at the same time. Based on this model, crude but nonetheless informative estimates are given that indicate that the race to the bottom has had a negative effect on demand in the vast majority of OECD countries. In this sense, the author finds that the persistence of policymakers to continue to compete on corporate taxes ‘imprudent’. Model-consistent policy recommendations are offered, chief among which are tax coordination or, failing that, technical changes in how individual countries collect corporation tax.

Is Eastern Europe to Blame for Falling Corporate Taxes in Europe?

2016 ◽  
Vol 30 (4) ◽  
pp. 855-884 ◽  
Author(s):  
Carissa L. Tudor ◽  
Hilary Appel
Keyword(s):  
Eastern Europe ◽  
Tax Competition ◽  
Tax Rates ◽  
The European Union ◽  
Corporate Tax ◽  
Data Set ◽  
Potential Efficacy ◽  
Corporate Tax Rates ◽  
Eastern European Countries ◽  
The Eu

When a dozen new countries joined the European Union in the mid-2000s, political tensions spiked over disparities in corporate income tax rates. Since the time of enlargement, leaders have tried repeatedly to enhance corporate tax coordination within the EU, as a result of fears of downward pressure on corporate tax rates and states’ weakening ability to collect revenues. At the same time, leaders from new member states in Eastern Europe with low corporate tax rates have contended that regional efforts to coordinate tax policies are not worthwhile, given that corporate tax competition is a global phenomenon. This article argues that corporate tax competition is more acute at the regional than the global level. While corporate tax rates are falling inside and outside the EU, we demonstrate using a large multiyear, multiregional data set that Eastern European countries have extremely low corporate tax rates relative to other EU and non-EU countries, even when controlling for multiple domestic economic and political factors. These findings support the potential efficacy of pursuing regional corporate tax reform to address the downward spiraling of rates in the EU.

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