Corporate taxation, fiscal competition and reaction fuctions.
National economies use fiscal competition to attract both foreign direct investments (FDI) and taxable profits (Deveraux et al. 2008). Ghinamo et al. (2010) show that the openness of the capital markets has a negative effect on corporate tax rates and a positive one on FDI flows, whereas volatility decreases the FDI inflows and the tax rate. The estimation of the reaction function, which describes how the tax rate of a country reacts to the tax policy of its competitors, has not provided any conclusive evidence. Our project improves the knowledge of the mechanism of fiscal competition by identifying the competitors of each country and studying the extent of the competition across time. We focus on the national reaction functions abandoning the standard spatial panel data approach to adopt a Bayesian VAR modelling strategy.
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