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Do Countries Compete over Corporate Tax Rates?

Michael P. Devereux, Ben Lockwood & Michela Redoano

CSGR Working Paper No. 97/02

May 2002

 

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 and 1999. 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 non-linear reaction functions, consistent with the model outlined in the paper.

Keywords: tax competition, corporate taxes, effective average tax rate, effective marginal tax rate.

JEL Classification Numbers: H0, H25, H77

Address for correspondence:

Centre for the Study of Globalisation and Regionalisation
University of Warwick
Coventry, CV4 7AL, UK
Email: b.lockwood@warwick.ac.uk

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