Corporate Tax Competition And The Decline Of Public Investment
Source: European Central Bank
The government's choices of the corporate tax rate and public investment are interdependent. In particular, they both respond positively to the other. Therefore, international tax competition not only drives corporate tax rates to lower levels but might also affect negatively the stock of public capital. The authors build a general equilibrium model that illustrates the relation between the two variables. They then add an element of international tax competition. Their simulations show that when international tax competition drives the statutory tax rate down from 45% to 30%, public investment is reduced by 0.4% of output at the steady state.