Working Paper: CEPR ID: DP3400
Authors: Michael P. Devereux; Ben Lockwood; Michela Redoano
Abstract: This Paper tests whether OECD countries compete with each other over corporate taxes in order to attract investment. We develop two models: with firm mobility, countries compete only over the statutory tax rate or the effective average tax rate, while with capital mobility, countries compete only over the effective marginal tax rate. We estimate the parameters of reaction functions using data from 21 countries between 1983-99. We find evidence that countries compete over all three measures, but particularly over the statutory tax rate and the effective average tax rate. This is consistent with a belief amongst governments that location choices by multinational firms are discrete. We also find evidence of concave reaction functions, consistent with the model outlined in the Paper.
Keywords: Corporate Taxes; Effective Marginal Tax Rate; Effective Tax Rate; Tax Competition
JEL Codes: H00; H25; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Countries' statutory tax rates (H20) | Other countries' statutory tax rates (H29) |
| Countries' effective average tax rates (EATR) (H26) | Other countries' effective average tax rates (EATR) (H29) |
| Countries' effective marginal tax rates (EMTR) (F16) | Other countries' effective marginal tax rates (EMTR) (F29) |
| Higher statutory tax rates (H29) | Stronger response of tax rates (H32) |
| Effective average tax rate (EATR) (H26) | Multinational firms' location decisions (F23) |
| Effective marginal tax rate (EMTR) (H31) | Multinational firms' location decisions (F23) |