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Asymmetric Effects of Tax Competition on FDI vs. Budget Balance in European OECD Economies: Heterogeneous Panel Approach

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  • Marina Beljić

    (Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia)

  • Olgica Glavaški

    (Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia)

  • Emilija Beker Pucar

    (Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia)

  • Stefan Stojkov

    (Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia)

  • Jovica Pejčić

    (Department of Economic Theory and Policy, Faculty of Economics in Subotica, University of Novi Sad, 24000 Subotica, Serbia)

Abstract

The global trends in taxation have generated a “race to the bottom” in capital income taxation, which is intended to be stopped by OECD through the introduction of a global minimum tax rate (15% of effective average tax rate—EATR). The question is whether the defined tax competition floor would have heterogeneous implications in different economies. The aim of this paper is to examine the long-term relationship between the EATR and FDI, and between the EATR and budget balance (BB) in European OECD economies in the period 1998–2021, using non-stationary, heterogeneous panels. According to the linear PMG model, a significant negative long-term relationship was revealed between the EATR and FDI and between the EATR and BB, while the error-correction parameters are significant and heterogeneous, showing that the speed of adjustments towards equilibrium is different across the analyzed economies. However, the nonlinear PMG results revealed asymmetry as the magnitude of the influence of an EATR reduction has a greater effect on FDI attraction and deficit deepening than an increase in the EATR on the opposite tendencies of FDI and deficit. Policymakers are facing a trade-off related to FDI attraction/budget deficit deepening when making decisions in relation to the EATR, and they are mostly oriented toward FDI inflow using EATR reduction in the analyzed economies.

Suggested Citation

  • Marina Beljić & Olgica Glavaški & Emilija Beker Pucar & Stefan Stojkov & Jovica Pejčić, 2023. "Asymmetric Effects of Tax Competition on FDI vs. Budget Balance in European OECD Economies: Heterogeneous Panel Approach," Risks, MDPI, vol. 11(12), pages 1-18, December.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:12:p:219-:d:1300908
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    References listed on IDEAS

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    1. Thanh, Su Dinh & Canh, Nguyen Phuc, 2020. "Taxation and capital formation: Non-linear effects and asymmetry between developing and developed countries," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    2. Peter Egger & Simon Loretz & Michael Pfaffermayr & Hannes Winner, 2009. "Bilateral effective tax rates and foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(6), pages 822-849, December.
    3. Ioan TalpoÅŸ & Ionel Vancu, 2009. "Corporate Income Taxation Effects On Investment Decisions In The European Union," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(11), pages 1-51.
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