Rate Cutting Tax Reforms and Corporate Tax Competition in Europe

31 Pages Posted: 21 Apr 2008 Last revised: 14 Aug 2008

See all articles by Friedrich Heinemann

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Michael Overesch

Universität zu Köln

Johannes Rincke

Ludwig Maximilian University of Munich (LMU); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: 2008

Abstract

While there is a large and growing number of studies on the determinants of corporate tax rates, the literature has so far ignored the fact that the behavior of governments in setting tax rates is often best described as a discrete choice decision problem. We set up an empirical model that relates a government's decision whether to cut its corporate tax rate to the country's own inherited tax and taxes in neighboring countries. Using comprehensive data on corporate tax reforms in Europe since 1980, we find evidence suggesting that the position in terms of the tax burden imposed on corporate income relative to geographical neighbors strongly affects the probability of rate cutting tax reforms. Countries are particularly likely to cut their statutory tax rate if the inherited tax is high and if they are exposed to low-tax neighbors.

Keywords: tax reform, tax competition, corporate taxes

JEL Classification: H20, H25, H71

Suggested Citation

Heinemann, Friedrich and Overesch, Michael and Rincke, Johannes, Rate Cutting Tax Reforms and Corporate Tax Competition in Europe (2008). ZEW - Centre for European Economic Research Discussion Paper No. 08-028 , Available at SSRN: https://ssrn.com/abstract=1123410 or http://dx.doi.org/10.2139/ssrn.1123410

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Michael Overesch

Universität zu Köln ( email )

Albertus-Magnus-Platz
WiSo-Gebäude
Cologne, 50923
Germany
0221/470-5605 (Phone)

HOME PAGE: http://www.steuer.uni-koeln.de/

Johannes Rincke (Contact Author)

Ludwig Maximilian University of Munich (LMU) ( email )

Seminar for Economic Policy
Akademiestr. 1/II
Munich, D-80799
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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