The Impact of Trade Integration and Agglomeration Economies on Tax Interactions : Evidence from OECD Countries

In average, statutory tax rates in OECD countries fell over 34,84% between 1982 and 2005. While the seminal papers on tax competition explain this fall in corporate tax rates by greater capital mobility, we build on the New Economic Geography literature to investigate empirically the impact of trade integration on tax competition. We use the disaggregated Trade and Production Database of the CEPII to build an index of trade phi-ness following the method of Head and Mayer (2004a). Firstly, we show that trade integration matters for the tax policy through two channels: (i) on the one hand trade integration reinforces tax interactions and accelerates the race to the bottom in corporate taxe rates, but (ii) on the other hand trade integration makes it possible for countries to set higher corporate tax rates as it improves their market access. We show that the second e¤ect becomes insigni...cant when we control for the ...rst one. This indicates that the overall impact of trade integration on corporate tax rates is negative and could explain the negative relationship between trade integration and corporate tax rates that we observed in OECD countries between 1983 and 1999. Secondly, we show that countries do not have the same ability to limit their dependence on other countries'...scal policy. More precisely, the ability of a country to set a high corporate tax rate increases with its market size and its market access, but decreases with the degree of its government involvement in the wage-setting.

Public Good Spillovers and Location of Firms

Impact of positive public good spillovers on international capital tax competition in a spatial economy with two countries imperfectly integrated and with different levels of productivity.Localisation des entreprises; Economie internationale; Externalités; Concurrence fiscale

Trade Integration and Business Tax Differentials: Theory and Evidence from OECD Countries

Building on recent contributions to the New Economic Geography literature, this paper analyses the relation between asymmetric market size, trade integration and business income tax differentials across countries. First, relying on a foot-loose capital model of tax competition, we illustrate that trade integration (or decreasing trade costs) reduces the importance of relative market size for differences in the extent of corporate taxation between countries. Then, using a dataset of 26 OECD countries over the period 1982-2004, we provide supportive evidence of these theoretical predictions: i.e., market size differences are strongly positively correlated with corporate income tax differences across countries but, crucially, trade integration weakens this link. These findings are obtained controlling for the potential endogeneity of trade integration and are robust to various alternative specifications and robustness checks.Tax competition; Trade integration; New Economic Geography; Tax differentials

Does trade liberalization trigger tax competition? Theory and evidence from OECD countries

This article aims at assessing the empirical relevance of New Economic Geography models of tax competition. We rely on a simple model to specify tax reactions functions, which we estimate with a panel covering (up to) 26 OECD countries over the period 1982 to 2006. We provide striking support for the two main predictions regarding the slope and the constant of the reaction function: national governments seem to adjust their corporate tax rate towards the level chosen in countries that are more populated, and they tend to set higher corporate tax rates when their country enjoys a high real market potential. Through the latter effect, trade integration exerts a positive influence on the level of corporate taxation. However, using a theoretically grounded index of bilateral trade integration, we also show that trade liberalization gives rise to significant tax interactions in the setting of effective average tax rates in the case of European countries, thus exerting a downward pressure on corporate tax rates

How labor market rigidities shape business taxation in a global economy?

We investigate the impact of trade liberalization upon the taxation of capital within a context of labor market rigidities. Using a model of trade and location, we show that labor market imperfections not only strengthen tax competition but also affect the relationship between trade integration and tax policies. Capital taxation follows a J-shaped relationship with trade costs when labor markets are flexible, whereas it may increase with falling trade costs in the presence of trade unions acting as Stackelberg leaders or playing simultaneously with governments. In addition, we analyze the outcome which arises from di§erences between the various countries' labor market institutions. Trade liberalization reduces the international differences in wage and capital taxation, making the unionized country more attractive.Tax competition; unions; capital mobility; trade integration

Trade integration and the destination of subsidies

We build a model of trade and location with two countries which differ with respect to their level of productivity. Public spending has two possible allocations: a direct subsidy to immobile households or a wage subsidy to mobile firms. We show that firms receive a lower net tax subsidy in the high-productivity country than in the low productivity one. Despite this less generous policy, the former country can host a larger share of firms, so that its total spending for firms can be higher than in the low productivity country when trade costs are low enough. The welfare analysis suggest that the second-best optimum requires an increase in the subsidy to households in both countries when the economies are weakly integrated or the productivity gap is low or the share of capital incomes redistributed outside the two economies is high.trade integration, firm location, public expenditure composition

Trade Integration and Business Tax Differentials: Theory and Evidence from OECD Countries

Working paper GATE 2011-23Building on recent contributions to the New Economic Geography literature, this paper analyses the relation between asymmetric market size, trade integration and business income tax differentials across countries. First, relying on a foot-loose capital model of tax competition, we illustrate that trade integration (or decreasing trade costs) reduces the importance of relative market size for differences in the extent of corporate taxation between countries. Then, using a dataset of 26 OECD countries over the period 1982-2004, we provide supportive evidence of these theoretical predictions: i.e., market size differences are strongly positively correlated with corporate income tax differences across countries but, crucially, trade integration weakens this link. These findings are obtained controlling for the potential endogeneity of trade integration and are robust to various alternative specifications and robustness checks

DE LA NATURE DES INTERACTIONS FISCALES AU SEIN DE L’UNION EUROPÉENE

Dans cet article, nous nous intéressons à la nature des interactions fiscales au sein de l’UE27 en matière d’impôt sur les sociétés. Nous estimons un modèle empirique de choix fiscal au sein de l’UE27 sur la période 1995-2007 en utilisant la méthode des moments généralisés et en nous focalisant sur l’origine des interactions fiscales entre pays géographiquement proches. Tout d’abord, nous mettons en évidence le rôle de l’appartenance politique sur les interactions fiscales au niveau international et nous montrons plus particulièrement que ces interactions motivées par l’appartenance politique sont limitées aux pays contigus. De plus, en lien avec la littérature sur la nouvelle économie géographique, les résultats suggèrent la présence d’une rente d’agglomération imposable dans les pays les plus riches de l’UE15 et d’une moindre dépendance de ces pays aux choix fiscaux des autres pays. Abstract - In this paper, we investigate the pattern of strategic interactions among the EU27 regarding corporate taxes. We thus estimate an empirical model of strategic interactions among 27 European countries over the period 1995-2007 by using GMM. We focus on the nature of tax interactions between neighbor countries. First, our results indicate the role of ideology on tax interactions at an international level and particularly we show that interactions motivated by the political trend are limited to contiguous countries. Second, in line with the New Economic Geography literature, the results suggest the existence of a taxable agglomeration rent for some countries which are also less dependent to other countries’ tax rates.INTERACTIONS FISCALES, CONCURRENCE FISCALE, TENDANCE POLITIQUE, IMPÔT SUR LES SOCIÉTÉS

The Impact of Trade Integration and Agglomeration Economies on Tax Interactions : Evidence from OECD Countries

In average, statutory tax rates in OECD countries fell over 34,84% between 1982 and 2005. While the seminal papers on tax competition explain this fall in corporate tax rates by greater capital mobility, we build on the New Economic Geography literature to investigate empirically the impact of trade integration on tax competition. We use the disaggregated Trade and Production Database of the CEPII to build an index of trade phi-ness following the method of Head and Mayer (2004a). Firstly, we show that trade integration matters for the tax policy through two channels: (i) on the one hand trade integration reinforces tax interactions and accelerates the race to the bottom in corporate taxe rates, but (ii) on the other hand trade integration makes it possible for countries to set higher corporate tax rates as it improves their market access. We show that the second e¤ect becomes insigni...cant when we control for the ...rst one. This indicates that the overall impact of trade integration on corporate tax rates is negative and could explain the negative relationship between trade integration and corporate tax rates that we observed in OECD countries between 1983 and 1999. Secondly, we show that countries do not have the same ability to limit their dependence on other countries'...scal policy. More precisely, the ability of a country to set a high corporate tax rate increases with its market size and its market access, but decreases with the degree of its government involvement in the wage-setting

Taxe carbone globale, effet taille de marché et mobilité des firmes

Working paper GATE 2011-05Nous analysons l'impact et les déterminants d'une taxe carbone globale dans une économie imparfaitement intégrée composée de pays de différente taille. A l'aide d'un modèle de commerce et de localisation, nous montrons tout d'abord que la concentration de firmes dans le pays disposant d'un avantage de taille de marché accroît les émissions totales de C O2 . L'introduction d'une taxe carbone globale conduit alors à des délocalisations de firmes du grand pays vers le petit pays de sorte que même fixée à un taux unique, une fiscalité carbone ne serait pas neutre du point de vue de la géographie économique. Enfin, parce qu'elles conduisent à une réduction des émissions mondiales de C O2 , ces relocalisations améliorent l'effcacité environnementale de la taxe carbone