Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/52417
Authors: 
Egger, Peter
Raff, Horst
Year of Publication: 
2011
Series/Report no.: 
Kiel Working Paper 1734
Abstract: 
This paper argues that the large reduction in corporate tax rates and only gradual widening of tax bases in many countries over the last decades are consistent with tougher international competition for foreign direct investment (FDI). To make this point we develop a model in which governments compete for FDI using corporate tax rates and tax bases. The model's predictions regarding the slope of policy reaction functions and the response of equilibrium tax parameters to trade costs and market size are shown to be consistent with panel data for 43 developed countries and emerging markets. Using estimated policy reaction functions we simulate the effect of regional trade integration and find that this integration has contributed significantly to the observed fall in corporate tax rates.
Subjects: 
corporate taxes
tax competition
foreign direct investment
multinational firms
free-trade areas
regional integration
JEL: 
F15
F23
H20
H25
Document Type: 
Working Paper

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