Market size and tax competition

Ottaviano, Gianmarco I.P.; Ypersele, Tanguy van

doi:10.1016/j.jinteco.2004.08.010

Cited by 122 publications

(154 citation statements)

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“…Our results support theoretical predictions from Ottaviano and Van Ypersele (2005) and Haufler and Wooton (2010). Specifically, we show that the tax gap responds positively to population size (and GDP) differences between countries and, crucially, that this relationship is significantly attenuated by trade integration.…”

Section: ---Figure 1 About Here ---supporting

confidence: 87%

“…While it has long been known that larger countries can sustain higher corporate taxes (a finding that goes back, at least, to Wilson, 1991;Bucovetsky, 1991), recent contributions to the NEG literature predict that bigger countries lose this advantage with increasing trade integration (or falling trade costs) because the site of production then becomes less relevant (Ottaviano and van Ypersele, 2005;Gaigné and Riou, 2007;Haufler and Wooton, 2010).…”

Section: ---Figure 1 About Here ---mentioning

confidence: 99%

“…First, we build on the foot-loose capital model of Ottaviano and Van Ypersele (2005) to derive two empirically testable predictions: a) tax differentials are a function of the coexistence of imperfect trade integration and asymmetric market sizes and b) increased trade integration reduces the ability of large countries to set higher taxes. Second, we evaluate these predictions employing data for 26 OECD countries (thus generating up to 325 country-pairs) over the period .…”

Section: ---Figure 1 About Here ---mentioning

confidence: 99%

“…First, relying on Ottaviano and Van Ypersele's (2005) footloose capital model of tax competition, we illustrate that trade integration 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.…”

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Trade integration and corporate income tax differentials

Exbrayat

Geys

2013

Int Tax Public Finance

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Building on recent contributions to the New Economic Geography literature, this paper analyses the relation between asymmetric market size, trade integration and corporate income tax differentials across countries. First, relying on Ottaviano and Van Ypersele's (2005) footloose capital model of tax competition, we illustrate that trade integration 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 alternative specifications. 2 "You've had a broad substantial reduction in corporate tax rates outside the US. That occurs at a time when it's much easier (...) for companies to shift investment and income to take advantage of lower tax rates overseas. (...) To have a more competitive system, you want to try to bring down the rate closer to the range of our major trading partners." (Timothy Geithner, former US Treasury Secretary, Wall Street Journal, 28-30 January 2011, 9) IntroductionLooking at the evolution of corporate tax rates in developed countries over the last three decades, two observations stand out. The first is a decline in corporate tax rates (Figure 1, (Figure 1, right-hand side). ---Figure 1 about here ---Recent studies indicate the importance of such tax differences for firm location or FDI flows (Bénassy-Quéré et al., 2005;Kammas, 2011;Brülhart et al., 2012). Empirical analyses aimed at understanding what allows some countries to sustain higher tax rates than others have, however, not followed suit. 2 Yet, such insights can have important policy implications.1 This decline is also present when looking only at countries that were OECD members throughout the 1982-2011 period. 2 While numerous studies analyse the decline in corporate tax rates (Devereux et al., 2002(Devereux et al., , 2008Davies and Voget, 2008), Gilbert et al. (2005) is the only study analysing the determinants of corporate tax rate differentials. Compared to that study, we provide a firmer theoretical rationale for the analysis, address potential endogeneity problems, control for the influence of various country-level variables, and employ a Our results support theoretical predictions from Ottaviano and Van Ypersele (2005) and Haufler and Wooton (2010). Specifically, we show that the tax gap responds positively to population size (and GDP) differences between countries and, crucially, that this relationship is significantly attenuated by trade integration. Our analysis thereby controls for the endogeneity of standard measures of trade integration by extracting the level of trade liberalisation between each country-pair from a gravity equation (Rose ...

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Section: ---Figure 1 About Here ---supporting

confidence: 87%

Section: ---Figure 1 About Here ---mentioning

confidence: 99%

Section: ---Figure 1 About Here ---mentioning

confidence: 99%

mentioning

confidence: 99%

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Trade integration and corporate income tax differentials

Exbrayat

Geys

2013

Int Tax Public Finance

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“…Ottaviano and van Ypersele (2005) have shown that in the presence of agglomeration economies tax competition can be second-best welfare-enhancing, as it may mitigate a tendency towards excessive spatial concentration of firms. In fact, agglomeration externalities create rents that can in principle be taxed by the jurisdiction hosting the agglomeration.…”

Section: Theoretical Background and Empirical Literaturementioning

confidence: 99%

The effect of agglomeration size on local taxes

Luthi

Schmidheiny

2013

Journal of Economic Geography

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Effect of Agglomeration Size on Local Taxes Abstract Standard tax competition models predict a 'race-to-the-bottom' of corporate tax rates when firms are mobile. Recent theoretical literature has qualified this view by offering a theoretical explanation why this extreme prediction need not occur: central regions with large clusters of economic activity are able to set positive tax rates without fearing to lose firms to peripheral regions as the firms would forego 'rents' from agglomeration economies. In this paper, we study whether local policy makers effectively tax such agglomeration rents. We test this with panel data from Swiss municipalities between 1985 and 2005. We find that large urban areas set indeed higher tax rates than small ones. This is consistent with the theoretical prediction. Within urban areas, however, municipal tax rates are unrelated to the size of economic activity in and around municipalities while they are positively related to the size of the political jurisdiction. We see this result as evidence that the standard tax competition model for asymmetric jurisdictions is at work in the competition of municipalities within an urban area. Both results are robust to controlling for reverse causality by using instrumental variables. Controlling for fixed effects in a 20 year panel is non-informative and neither supports nor contradicts these findings. As a robustness check we introduce an new measure of cluster intensity which considers the varying intensities in agglomeration economies across sectors. Terms of use: Documents inJEL-Code: R300, H320.

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The Economy as a Complex Spatial System

Commendatore¹,

Kubin²,

Bougheas³

et al. 2018

Springer Proceedings in Complexity

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Springer Complexity is an interdisciplinary program publishing the best research and academic-level teaching on both fundamental and applied aspects of complex systems-cutting across all traditional disciplines of the natural and life sciences, engineering, economics, medicine, neuroscience, social, and computer science.Complex Systems are systems that comprise many interacting parts with the ability to generate a new quality of macroscopic collective behavior the manifestations of which are the spontaneous formation of distinctive temporal, spatial, or functional structures. Models of such systems can be successfully mapped onto quite diverse "real-life" situations like the climate, the coherent emission of light from lasers, chemical reaction-diffusion systems, biological cellular networks, the dynamics of stock markets and of the Internet, earthquake statistics and prediction, freeway traffic, the human brain, or the formation of opinions in social systems, to name just some of the popular applications.Although their scope and methodologies overlap somewhat, one can distinguish the following main concepts and tools: self-organization, nonlinear dynamics, synergetics, turbulence, dynamical systems, catastrophes, instabilities, stochastic processes, chaos, graphs and networks, cellular automata, adaptive systems, genetic algorithms, and computational intelligence.The three major book publication platforms of the Springer Complexity program are the monograph series "Understanding Complex Systems" focusing on the various applications of complexity, the "Springer Series in Synergetics", which is devoted to the quantitative theoretical and methodological foundations, and the "SpringerBriefs in Complexity" which are concise and topical working reports, case-studies, surveys, essays, and lecture notes of relevance to the field. In addition to the books in these two core series, the program also incorporates individual

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Market size and tax competition

Cited by 122 publications

References 20 publications

Trade integration and corporate income tax differentials

Trade integration and corporate income tax differentials

The effect of agglomeration size on local taxes

The Economy as a Complex Spatial System

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