International tax competition: A reappraisal

Abstract

This paper investigates the interactions between tax policies at the international level (OECD countries). Both contemporaneous and time-delayed tax interactions are considered using Spatial Dynamic Panel Data model from Yu et al. (2008). Moreover, we test if the interdependence between governments exists due to the geographic closeness but also due to the proximity in terms of public investment levels. The results show, on one hand, that there are positive contemporaneous but negative time-delayed interactions. It is compatible with the existence of tax competition in a contemporaneus way, but also with the free-riding phenomena in the time-delayed approach. On the other hand, we show that interactions between countries are higher when they have similar levels of public investment than for the geographical closeness. This last result confirms the theoretical assumption that countries with close infrastructure investment are more likely to achieve tax harmonization. However, the negative time-delayed interactions are not consistent with this hypothesis, proving both tax and infrastructure competition between the OECD countries still exists. JEL Classification: E62, H54, H87 Key Words: Tax Competition; Yardstick Competition; Public Infrastructure Investment; Strategic Interactions; Spatial Dynamic Panel Data model; OECD.