Is international tax competition only about taxes? A market-based perspective

Céline Azémar (1, 2) , Rodolphe Desbordes (3) , Ian Wooton (4)

1 Adam Smith Business School
2 ESC [Rennes] - ESC Rennes School of Business
3 SKEMA Business School
4 University of Strathclyde [Glasgow]

This paper revisits tax competition among governments for foreign direct investment (FDI) by considering the role played by the economic dynamism of competitors on the setting of corporate tax rates (CTRs). Using a database with worldwide coverage over the period 1995–2014, we find that strong growth performance of neighbouring countries is associated with a lower CTR, especially in developed countries. This spatial effect is particularly manifest if competing countries are large and open to capital flows. These results appear to hold in most regions of the world and suggest that governments perceive foreign economic dynamism as a threat, leading them to reduce their CTRs to maintain their FDI attractiveness.

Mots clés: Tax competition; Country size; Foreign direct investment; Developing countries; Free-trade zones; Spatial lag

Domaines: Économie et finance quantitative [q-fin]

Céline Azémar, Rodolphe Desbordes, Ian Wooton. Is international tax competition only about taxes? A market-based perspective. Journal of Comparative Economics, 2020, 48 (4), pp.891-912. ⟨10.1016/j.jce.2020.05.002⟩. ⟨hal-03163896⟩