Capital Account Liberalization and Corporate Taxes

Capital Account Liberalization and Corporate Taxes

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This paper studies whether exchange controls, particularly on the capital account, affect the choice of corporate tax rates, using a panel of 21 OECD countries over the period 1983-99. It builds on existing literature by (1) using a unique dataset with several different measures of the corporate tax rate calculated from the actual parameters of the tax systems, and (2i) allowing exchange controls to affect the intensity of strategic interaction between countries in setting taxes, as well as the levels of tax they choose. We find some evidence that (1) the level of a countrya€™s tax, other things equal, is lowered by a unilateral liberalization of exchange controls; and (2) that strategic interaction in taxsetting between countries is increased by liberalization. These effects are stronger if the country is a high-tax one and if the tax is the statutory or effective average one. There is also evidence that countriesa€™ own tax rates are reduced by liberalization of exchange controls in other countries.So, a second contribution of this paper is to allow for the effects of all countriesa#39; exchange controls on a given countrya#39;s taxa€”a more symmetric specification. ... The studies referred to above can be divided according to whether they focus on corporate tax revenues or tax rates. ... average tax rates (EA T RS), the latter simply being the ratio of corporate tax paid to pretax profit (Devereux and Griffith ( 2003)).

Title:Capital Account Liberalization and Corporate Taxes
Author:Mr. Ben Lockwood, Michael B. Devereux, Michela Redoano
Publisher:International Monetary Fund - 2003-09-01


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