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Competition in Corporate and Personal Income Tax: Evidence from 67 Developed and Developing Countries

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  • Young Lee

    (Hanyang University)

Abstract

This paper empirically investigates tax competition in corporate income taxes (CIT) and personal income taxes (PIT) in 67 countries between 1981 and 2015. We find that tax competition in PIT is weaker than that in CIT, and various domestic considerations appear to act strongly in determining PIT. We also find that tax competition is a key determinant in setting CIT in developing countries as well as in developed countries. In addition to estimating the response function, we explore the possibility of adjustment cost and rigidity by estimating the error correction model type (ECM-type) and pooled mean group estimation(PMG). ECM-type and PMG estimations provide evidence of a partial adjustment instead of an instant full adjustment of tax rates. Furthermore, we find evidence that countries tend to adjust more strongly when lowering than raising rates, in agreement with the kinked demand curve model, which has not been explored in tax competition studies.

Suggested Citation

  • Young Lee, 2020. "Competition in Corporate and Personal Income Tax: Evidence from 67 Developed and Developing Countries," Korean Economic Review, Korean Economic Association, vol. 36, pages 101-133.
    • Handle: RePEc:kea:keappr:ker-20200101-36-1-04
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    More about this item

    Keywords

    Tax Competition; Corporate Income Taxes; Personal Income Taxes; System Generalized Method of Moments; Pooled Mean Group; Kinked Demand Curve;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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