Madies and S. Charlot and S. Feld and E. These studies find, in general, evidence for tax competition, and more specifically evidence indicating that tax rates are strategic complements.
Tax: an international political economy reading list
However, there are results in the literature indicating that tax rates are strategic substitutes: Rork and Chirinko and Wilson , 46 x J. Chirinko and J. One criticism that has been voiced recently against much of the empirical literature on local tax competition is that the estimates rely on unreasonable identifying assumptions. Gibbons and H.
A small number of papers use more elaborate identification strategies. Lyytikainen exploits a reform that increased statutory lower limits in Finland to induce quasi-exogenous variation in local tax rates. He finds no evidence for tax competition and more generally for tax mimicking in property tax rates.
Baskaran uses a reform to the local fiscal equalisation scheme in a German subfederal state to identify tax competition by municipalities in a neighbouring state. Again no evidence in favour of tax competition is found. These results contrast the findings based on the standard approach described above, suggesting that the evidence for tax competition in much of the earlier literature might indeed be suspect.
Similarly, Parchet focuses on Swiss municipalities located close to cantonal borders. He uses variation in cantonal-level tax rates in neighbouring cantons to induce quasi-exogenous variation in tax rates in a given municipality. His results suggest once more that standard approaches lead to wrong conclusions. While he finds evidence for tax competition when using the standard methodology with the sign of the estimates indicating that tax rates are strategic complements, once he uses his new methodology, he finds that tax rates are actually strategic substitutes.
The empirical literature on international tax competition is in many ways more complex than the one on local tax competition. One reason for this complexity is that it is difficult to identify an appropriate measure for the tax burden on mobile factors. At the local level, it is relatively easy to measure the tax burden on a specific mobile factor because bases tend to be the same. Second, any further taxes that could affect the decisions of this mobile factor are typically set by higher tiers of government and are therefore the same for all local governments.
A second complication is that countries can compete over various mobile tax bases. Theoretical models typically model some abstract mobile production factor that they refer to as capital. But as indicated previously, the mobile factor can assume many forms. It can be understood as financial capital, paper profits, FDI or firms and high-skilled individuals. Each of these factors is subject to different taxes. Identifying a single measure that reflects for each country the tax burden on mobile factors is therefore challenging.
One strand of the literature uses total tax revenues or tax revenues from the corporate and related taxes e. Swank and S. Garrett and D.
Mendoza, A. Razin, and L. The idea is that tax competition should increase with economic integration. Hence, there should be a negative relationship between economic integration and tax revenues. In general, studies following this approach find no evidence for a decline in tax revenues due to economic integration, and therefore no evidence for harmful tax competition. Devereux and S. Similarly, using a novel method to calculate tax rates on factor incomes, Mendoza and Tezar 54 x E. Mendoza and L. According to Garrett and Mitchell, above n.
For further evidence in support of the compensation hypothesis, which indicates that globalisation leads to higher rather than lower taxation, see also D. However, revenue-based measures for tax competition have a number of shortcomings. Devereux, R. Griffith and A. First, total tax revenues are endogenous to the tax burden on mobile factors, which can obviously migrate to countries with lower tax rates.
Consequently, this measure will tend to underestimate the true tax burden. Second, total tax revenues reflect the burden not only on mobile factors but also on immobile factors. Consequently, tax revenues as share of GDP or similar measures will proxy the true tax burden on mobile factors such as corporations with error. Third, this ratio is a backward-looking measure: it is affected by past tax policies, but does not accurately indicate how future policies will evolve. Mobile factors, however, will be primarily concerned with future developments.
Another strand of the literature, therefore, makes a different compromise. Rather than analysing the full tax burden, these studies focus on a specific mobile factor. The taxation of corporations has received primary attention. Countries have strong incentives to attract corporations by offering lower tax burdens.
The Politics of Global Tax Governance - CRC Press Book
Corporations not only represent a valuable tax base, they also offer employment to voters. The main aim of this literature is to uncover trends and co-movements in tax rates between different countries and to interpret these trends with respect to international tax competition. Yet while it is possible that corporations are affected by the statutory tax rate, it is problematic that it might not reflect the true tax burden at the national level as definitions of the bases vary between countries.
To address this problem, researchers calculate effective tax rates that are distinct from the statutory ones and reflect both bases and rates. Two types of effective tax rates have been used in the literature. First, the effective marginal tax rate EMTR.
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This measure reflects the increase in the pre-tax cost of capital of an investment whose post-tax returns just cover the interest rate, that is a marginal investment. More specifically, the difference between pre-tax and post-tax returns divided by pre-tax returns of the marginal investment is defined as the EMTR. Incentives to invest decline with increasing EMTR. One feature of the EMTR is that only continuous investment decisions — how much to invest — are affected by this tax measure. Discrete choices — whether or not to invest at all — are not accurately captured by the EMTR.
When deciding whether to invest at all, mobile factors will not be particularly concerned with the tax burden on a marginal investment but with the average tax burden on the investment as a whole. In order to model such discrete decisions, researchers calculate an alternative measure: the effective average tax rate EATR. This measure is typically defined as the net present value of all future tax payments divided by the net present value of all future pre-tax returns.
There are several studies that explore trends in statutory or effective tax rates and tax revenues.
An early example is the report by the Ruding Committee that investigated capital taxation in the s. This report finds that statutory tax rates have declined in Europe, while bases have become broader. The committee concludes from this pattern that tax competition leads to lower tax rates. Genschel, Kemmerling and Seils show that statutory corporate tax rates in Europe have declined faster than in the rest of the world since , from which they conclude that corporate tax competition in the EU is stronger than elsewhere.
Genschel, A. Kemmerling and E. Similarly, Devereux, Griffith and Klemm establish for the EU and the G7 countries that effective average corporate tax rates have declined, while marginal tax rates have not changed much in the s. These results, too, provide some evidence for tax competition causing lower tax rates. While continuing to emphasise forward-looking statutory and effective tax rates, another strand of the literature uses formal econometric techniques to study tax competition instead of looking only at trends and patterns.
Fontagne and A. Bellack and Leibrecht provide similar evidence for a panel of Central- and Eastern-European countries. Bellak and M. Wolff too 63 x G. However, the effect varies for different FDI subcomponents. Auerbach ed. More specifically, the author shows that through the course of European integration, effective average tax rates have decreased in small and increased in large EMU countries.
A further strand of the literature attempts to apply the spatial models through which local tax competition is analysed to the international level. The idea is to explore whether tax rates in neighbouring countries affect the rates in a given country. Devereux, Lockwood and Redoano find in a sample of 21 OECD countries that they compete over corporate tax rates only if their economies are open.
Devereux, B. Lockwood and M.