Publication

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 the authors 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.