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

The paper empirically investigates tax competition in corporate income taxes (CIT) and personal income taxes (PIT) in 67 countries between 1981 and 2015. A large sample with more variations allows us to find tax competition in corporate income taxes (CIT) even after controlling for country dummies, year dummies, and country-specific trends. We find tax competition in PIT is much weaker than that in CIT and various domestic considerations appear to work more 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 response function, we explore the possibility of adjustment cost and rigidity by estimating error correction model (ECM) and pooled mean group estimation (PMG). ECM and PMG estimations provide evidence for a partial adjustment instead of an instant full adjustment of tax rates. We also find evidence that countries tend to adjust more strongly when lowering rates than they do when raising rates, which is like the kinked demand curve model in spirit.