DP3400 Do Countries Compete over Corporate Tax Rates?

Author(s): Michael P. Devereux, Ben Lockwood, Michela Redoano
Publication Date: May 2002
Keyword(s): corporate taxes, effective marginal tax rate, effective tax rate, tax competition
JEL(s): H00, H25, H77
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3400

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.