Country Size and Corporate Tax Rate: Rational and Empirics

Céline Azémar, Rodolphe Desbordes, Ian Wooton

Research output: Working paperDiscussion paper

Abstract

This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member‐states for the period 1981‐2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.
LanguageEnglish
Place of PublicationLondon
Number of pages30
Publication statusPublished - 2015

Publication series

NameInternational Trade and Regional Economics
PublisherCentre for Economic Policy Research
No.10800
ISSN (Print)0265-8003

Fingerprint

Corporate tax rates
Country size
Empirics
Prediction
Tax rate
Market access
Multinational firms
European Union
Competitors
Rationale
Industry
Corporation tax

Keywords

  • corporate tax rate
  • tax competition 
  • foreign direct investment (FDI)
  • country size

Cite this

Azémar, C., Desbordes, R., & Wooton, I. (2015). Country Size and Corporate Tax Rate: Rational and Empirics. (International Trade and Regional Economics; No. 10800). London.
Azémar, Céline ; Desbordes, Rodolphe ; Wooton, Ian. / Country Size and Corporate Tax Rate : Rational and Empirics. London, 2015. (International Trade and Regional Economics; 10800).
@techreport{009d8b17cf79440fbb097ae13f5a92d6,
title = "Country Size and Corporate Tax Rate: Rational and Empirics",
abstract = "This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member‐states for the period 1981‐2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.",
keywords = "corporate tax rate, tax competition , foreign direct investment (FDI), country size",
author = "C{\'e}line Az{\'e}mar and Rodolphe Desbordes and Ian Wooton",
year = "2015",
language = "English",
series = "International Trade and Regional Economics",
publisher = "Centre for Economic Policy Research",
number = "10800",
type = "WorkingPaper",
institution = "Centre for Economic Policy Research",

}

Azémar, C, Desbordes, R & Wooton, I 2015 'Country Size and Corporate Tax Rate: Rational and Empirics' International Trade and Regional Economics, no. 10800, London.

Country Size and Corporate Tax Rate : Rational and Empirics. / Azémar, Céline; Desbordes, Rodolphe; Wooton, Ian.

London, 2015. (International Trade and Regional Economics; No. 10800).

Research output: Working paperDiscussion paper

TY - UNPB

T1 - Country Size and Corporate Tax Rate

T2 - Rational and Empirics

AU - Azémar, Céline

AU - Desbordes, Rodolphe

AU - Wooton, Ian

PY - 2015

Y1 - 2015

N2 - This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member‐states for the period 1981‐2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.

AB - This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member‐states for the period 1981‐2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.

KW - corporate tax rate

KW - tax competition 

KW - foreign direct investment (FDI)

KW - country size

UR - http://cepr.org/

M3 - Discussion paper

T3 - International Trade and Regional Economics

BT - Country Size and Corporate Tax Rate

CY - London

ER -

Azémar C, Desbordes R, Wooton I. Country Size and Corporate Tax Rate: Rational and Empirics. London. 2015. (International Trade and Regional Economics; 10800).