Monday, September 24, 2007
With economic integration rapidly growing at all level, understanding the incentives that this provides in the design of fiscal policies at the national level is fundamental. The most obvious implication of international competition on the taxation of mobile factors is a race to the bottom in the determination of tax rates. However, empirical evidence on the relationship between the strength of competitive pressures and corporate tax rates is mixed. The present paper aims to provide an in depth analysis of the implications of the diverse assumptions that have been made in the theoretical literature. Moreover, the main approaches to the empirical analysis of the relationship between competition and the level of taxation are presented. The paper shows that a large number of factors play a role and accounting for the interactions among all of them in a single model is extremely complicated. This may be seen as a main determinant of the variety in the results obtained so far, both in theoretical and empirical research.