Leaning Right and Learning from the Left: Diffusion of Corporate Tax Policy in the OECD

Abstract

There is an increased focus in comparative politics and international relations on how choices of national governments are dependent on choices made by governments in other countries. We argue that while the relationship between policy choices across countries is often labeled as either diffusion or competition, in many cases the theoretical mechanisms underpinning these labels are unclear. In this paper we build a model of social learning with a specific application to the diffusion of corporate tax reductions. This model yields predictions that are differentiable from existing models of tax competition. Specifically, we argue that social learning is most likely to take place in the wake of tax policy cuts by left governments. We test this model using an existing data set of corporate tax rate changes and an author-created data set of changes in tax legislation, covering twenty OECD countries from 1980-1998.

Keywords: Tax Policy, Corporate Taxation, Tax Competition, Social Learning, Diffusion

JEL Classification: D8, D84, F42, H2