## _wp12252 - 2. Determinants of Corporate Tax Rates: Full Sample, OECD and non-OECD

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### Introduction and scope
- Examines how financial globalization (FG) affects corporate tax policy and corporate tax revenues across industrial, emerging market, and developing countries over the past five decades.
- Analyzes interactions between FG and strategic behavior (a “Stackelberg” leadership role by the United States or another major trading partner), trade integration, global “sentiment,” and domestic political economy factors.
- Uses multiple measures of FG and tax revenues, statutory corporate tax rate data from IMF and PriceWaterhouse, panel estimation, and allows parameter heterogeneity across country groupings (for example, “tax havens” vs. nonbank center OECD nations).
- Empirical organization: policy context; analytical framework and hypotheses; data and methodology; results; supplementary appendices.

### Key empirical findings
- No general negative relationship between country-specific financial integration and corporate tax rates and revenues.
- In some OECD and non-OECD groups, an increase in FG is highly statistically significantly associated with a subsequent upward movement in corporate tax rates and revenues.
- Little evidence that overall greater global financial market integration leads to downward pressure on corporate tax rates.
- Evidence of U.S. “Stackelberg” type leadership:
  - Deviations above the U.S. corporate tax rates appear not to be sustained over the longer term.
  - For OECD countries, cuts in U.S. tax rates under conditions of financial openness in the home country may increase the probability of home country cuts, whereas increases by the United States ameliorate pressure for cuts.
- Greater trade integration, other things given, is associated with lower statutory corporate tax rates.
- Global “sentiment” (changes in attitudes toward the role of markets) exerts downward pressure on corporate rates, offsetting the impact of FG.
- Domestic political economy factors matter: high share of capital asset concentration in emerging market nations that are relatively closed is negatively and highly statistically significantly associated with lower tax rates.

### Policy and macroeconomic context (selected numeric facts)
- Advanced economies’ gross public debt ratios projected to average over 110 percent of GDP by end-2012.
- General government fiscal deficits for the advanced economies:
  - 8.9 percent of GDP in 2009.
  - 7.8 percent of GDP in 2010.
  - 6.6 percent of GDP in 2011.
  - Projected to remain around 5 percent of GDP for the next two years.
- U.S. National Commission recommended cutting the corporate tax rate to 28 percent from 35 percent (proposal cited).
- Japan: proposal to reduce CIT from 40 to 35 percent (cited); debt ratio exceeding 225 percent of GDP at end-2010; general government deficit for 2009–10 averaged 10 percent of GDP; illustrative adjustment of over 13 percent of GDP required to reduce and stabilize debt ratio at 200 percent of GDP by 2020.
- Canada: CTR cut to 16.5 percent, effective January 1, 2011.
- Emerging markets: total FDI to India rose from around $8 billion in the two years before the global crisis to nearly $37 billion in 2009–10.
- U.S. firms have “parked” roughly $1 trillion in “stranded profits” in tax havens (cited).

### Evidence on corporate tax rates, revenue, and firm behavior
- Mixed evidence on CIT impact on GDP growth: authors’ estimate — lagged corporate tax variable coefficient of -0.31 with t-statistic of 0.6 (not statistically significant).
- De Mooij and Ederveen (2008): a 1 percentage point cut in the tax rate in a country increases the size of profit reported by a multinational company in that country by 2 percent (citation preserved).
- Trend: top corporate tax rates worldwide have declined over past thirty years; regional CTR averages fell from the 35 percent to 55 percent prevailing in 1980 to 25 to 35 percent in 2009.
- Decline in cross-country dispersion: in 1982 half of countries had statutory rates between 43.8 and 55 percent (range 11.2 percentage points); by 2003 interquartile range declined to 5.3 percentage points.

### Theoretical framing and alternative mechanisms
- Reviewed null hypothesis: FG leads to lower tax rates on mobile factors via competition and profit shifting.
- Mechanisms considered: international tax arbitrage, elasticity of corporate investment to tax rates, electronic commerce, intra-company trade, offshore financial centers.
- Alternative explanations for persistence of nonzero rates:
  - High costs to move physical assets.
  - Publicly provided services and macroeconomic/political stability attract capital.
  - Strategic considerations (Stackelberg leadership) can raise or stabilize rates.
  - Domestic political institutions and veto players moderate pure tax competition.

### Political economy, elites, and the role of asset concentration
- Elites owning concentrated capital in closed economies can more effectively organize (“voice”) to resist higher capital and corporate taxation.
- Financial openness enables portfolio diversification for elites, shifting influence from “voice” toward “exit.”
- Asset concentration conditions how FG affects corporate tax rates: in closed non-OECD economies, higher capital share is associated with lower tax rates; in fully open non-OECD economies the marginal effect of capital share on tax rates becomes positive but modest.

### Diffusion of ideas and global sentiment
- Global “sentiment” regarding markets versus governments influences corporate tax policy.
- Top personal income tax rates and corporate rates trended together until late 2000s.
- Declines in Communist Party vote share associated with subsequent declines in corporate tax rates (quantified below).

### Data, panels, and measurement (selected counts and series)
- Central government tax rates: 4,337 observations for 141 countries in a strongly unbalanced panel; usable matched data for 94 countries starting as early as 1953.
- Corporate tax revenue as percent of GDP: 2,048 observations, with no usable observations prior to 1980 and ending in 2009.
- Panel construction: 5-year non-overlapping averages; 573 five-year averaged panels for up to 94 countries.
- Financial globalization (de facto): Lane and Milesi-Ferretti (2007) measures — LogAssets and LogLiabilities; TOTAL = sum of these.
- Capital account openness (de jure): Quinn (1997), Quinn and Toyoda (2007) CAPITAL; GlobalCAPITAL is world average net of home country contribution.
- Capital share (CS): UNIDO measure CS = [1 - (Wages and Salaries / Value Added)] used as indicator of capital asset concentration.
- Global anti-capitalist ideology: Communist Party vote shares series for 23 countries (1949–52 through 2006).

### Econometric approach and diagnostics
- Uses pooled cross-section time-series models on 5-year intervals; differenced GMM-system estimation (Arellano and Bover (1995); Blundell and Bond (1998)) to address persistence and endogeneity.
- Instrument strategy: internal instruments (third lags of levels; second lags of differences); global variables treated as exogenous.
- Transformation: differencing of tax rates, revenues, and RHS variables; 1-step robust GMM-system estimates reported where serial correlation diagnostics pass.

### Factor analysis and identification
- Four factors explain roughly 70 percent of variance in factor analyses.
- Corporate Tax Rates load negatively on factors associated with Trade Openness and Financial Integration and positively with Communist Party vote shares in certain factor solutions.
- Implication: corporate tax rates and international integration variables form a common underlying dimension; causal identification is complex.

### Quantitative empirical results (selected coefficients and magnitudes)
- Communist Party vote share effect:
  - Strong, highly statistically significant positive coefficient: as the vote share decreases (increases) by 1 percent, corporate tax rates subsequently decrease (increase) by 3–5 percent.
  - Given a roughly 4½ point drop in communist party voting, the implied estimated drop in tax rates is in the 14–22 percent range.
- Global capital account openness:
  - Movement from lowest to highest values of global capital account openness translates into a 6–12 percent increase in corporate tax rates.
- Heterogeneity by country group:
  - Nonbanking OECD: a country 20 points higher than U.S. CTR predicted to drop by 8 points relative to U.S. in subsequent period (example cited).
  - Lower-income emerging markets: effects mainly estimated in ranges substantially below U.S. rate.
  - Banking centers: estimated line mostly below zero; they do not raise taxes above U.S. rate (not statistically significant in observed ranges).
- Capital share interactions (non-OECD vs OECD):
  - Non-OECD, closed economy: a 10-point increase in capital share associated with a 2-percent decrease in corporate tax rates (statistically significant in closed ranges).
  - For a completely open emerging market economy (capital = 100), a 10-percent increase in corporate value added associated with a subsequent 0.7-percent increase in tax rates (statistically significant).
- Growth and corporate tax: lagged corporate tax coefficient in growth specification = -0.31, t-statistic = 0.6 (not statistically significant).

### Robustness, limitations, and methodological notes
- OLS, random effects, and fixed effects produce substantively similar results in full sample, but fixed effects models limited by few observations per instrument.
- GMM-system preferred where serial correlation diagnostics pass.
- Data limitations: UNIDO capital share series sparse; corporate revenue series have gaps before 1980; measurement error addressed by 5-year averaging and GMM instruments.
- Collinearity and factor structure imply international integration variables are facets of a common underlying dimension, complicating causal interpretation.

### Conclusions and policy implications
- Main empirical statements:
  - "There is no negative relationship between the extent of FG and corporate tax rates and revenues."
  - "Across some groups of OECD and non-OECD countries, an increase in FG is highly statistically significantly associated with a subsequent upward movement in corporate tax rates and revenues."
  - "The greater the trade openness, the lower the CT rates."
  - "There is little evidence that overall higher global financial market integration leads to downward pressure on corporate tax rates."
- U.S. leadership: robust evidence of Stackelberg leadership by the United States; deviations from U.S. rates tend to move toward U.S. rates over time.
- Fiscal policy implications:
  - Globalization does not mechanically reduce policy maneuverability for setting corporate tax rates.
  - Rolling back globalization would not effectively increase flexibility in CT setting.
  - An increase in U.S. corporate tax rates would provide flexibility to nudge rates higher in many other economies; pronounced U.S. cuts would have adverse externalities for fiscally pressured economies.
- Domestic political economy: capital concentration in closed emerging market economies drives lower corporate tax rates; openness reduces elites’ ability to organize domestically against higher rates.
- Areas for further research:
  - Dynamic effects of home vs. U.S. taxation on revenues.
  - The correlated global trend of tax rates on immobile and mobile factors and the role of global sentiment beyond strategic competition.
  - Capital share concentration’s effect on corporate tax policy in closed economies (authors note a novel demonstration).

*Source: _wp12252 - 2. Determinants of Corporate Tax Rates: Full Sample, OECD and non-OECD; canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12252.pdf*

### 2. Determinants of Corporate Tax Rates: Full Sample, OECD and non-OECD .....................36

### 2. Determinants of Corporate Tax Rates: Full Sample, OECD and non-OECD

### Introduction and scope
- Examines conditions under which financial globalization (FG) affects corporate tax policy and corporate tax revenues across a large panel of industrial, emerging market, and developing countries over the past five decades.
- Analyzes interaction between FG and strategic behavior (a “Stackelberg” type of leadership by the United States or another major trading partner), trade integration, global “sentiment,” and domestic political economy factors.
- Employs a variety of measures of FG and tax revenues, statutory corporate tax rate data from the IMF and PriceWaterhouse, panel estimation, and allows for parameter heterogeneity across country groupings (for example, “tax havens” vs. nonbank center OECD nations).
- Organized empirical work: policy context (Section II), analytical framework and testable hypotheses (Sections III–IV), data and methodology (Section V), results (Section VI), and supplementary results in appendices.

### Key empirical findings (authors’ summary)
- No general negative relationship between country-specific financial integration and corporate tax rates and revenues; in some OECD and non-OECD groups, an increase in FG is highly statistically significantly associated with a subsequent upward movement in corporate tax rates and revenues.
- Little evidence that overall greater global financial market integration leads to downward pressure on corporate tax rates.
- Evidence of “Stackelberg” type leadership by the United States:
  - Deviations above the U.S. corporate tax rates appear not to be sustained over the longer term.
  - For OECD countries, cuts in U.S. tax rates under conditions of financial openness in the home country may increase the probability of home country cuts, whereas increases by the United States ameliorate pressure for cuts.
- Greater trade integration, other things given, is associated with lower statutory corporate tax rates.
- Global “sentiment” (changes in attitudes toward the role of markets) exerts downward pressure on corporate rates, offsetting the impact of FG.
- Domestic political economy factors matter:
  - High share of capital asset concentration in emerging market nations that are relatively closed is negatively and highly statistically significantly associated with lower tax rates.

### Policy and macroeconomic context
- The paper situates the analysis in the aftermath of the global crisis, noting sharp increases in fiscal deficits and public debts—especially in advanced economies—and the consequential policy debates about filling fiscal gaps.
- Advanced economies’ gross public debt ratios are projected to average over 110 percent of GDP by end-2012, some 35 percentage points of GDP higher than before the crisis, and the highest since the second World War.
- General government fiscal deficits for the advanced economies:
  - Estimated at 8.9 percent of GDP in 2009 (historical record).
  - 7.8 percent in 2010.
  - 6.6 percent of GDP in 2011.
  - Projected to remain around 5 percent of GDP for the next two years.
- Most consolidation plans focus on expenditure cuts rather than broad-based tax increases; no case of CIT rates being raised (as of the paper).
- U.S. National Commission recommended cutting the corporate tax rate (CTR) to 28 percent from the current 35 percent (with other reforms proposed).
- Country actions cited:
  - Japan’s proposal to reduce CIT from 40 to 35 percent.
  - Canada’s CTR cut to 16.5 percent, effective January 1, 2011.
- Japan’s fiscal position highlighted:
  - Debt ratio exceeding 225 percent of GDP at end-2010.
  - General government deficit for 2009–10 averaged 10 percent of GDP.
  - Illustrative analysis suggests an adjustment of over 13 percent of GDP would be required to reduce and stabilize the debt ratio at 200 percent of GDP by 2020.
- Emerging markets:
  - Total foreign direct investment to India rose from around $8 billion in the two years before the global crisis to nearly $37 billion in 2009–10, and is projected to rise further.
  - It is estimated that over the next two years, at least a quarter of net profits of U.S. Standard & Poor’s 500 companies will come from emerging market operations (and around half are projected to come from all overseas operations).

### Evidence on corporate tax rates and growth, and firm location
- Mixed evidence on the impact of CIT rates on overall GDP growth.
- Authors’ estimate: in a general specification accounting for robust determinants of growth, the lagged corporate tax (CT) variable has a coefficient of -0.31 and a t-statistic of 0.6 (not statistically significant).
- De Mooij and Ederveen (2008) cited: a 1 percentage point cut in the tax rate in a country increases the size of profit reported by a multinational company in that country by 2 percent.

### Theoretical framing: open-economy macroeconomics and “race to the bottom”
- Null hypothesis reviewed: financial globalization leads to lower tax rates on mobile factors of production through increased competition and profit shifting.
- Devereux (2008) argument cited: continuing fall in statutory and effective corporation tax rates in OECD and EU countries is consistent with increasing competition between countries over mobile firms, capital, and profit; as globalization proceeds, rates may continue to fall.
- Mechanisms include increased international tax arbitrage, high elasticity of corporate investment decisions to tax rates, electronic commerce, intra-company trade, and off-shore financial centers that complicate monitoring corporate profits and encourage lower statutory rates.
- Empirical observation: top corporate tax rates worldwide have declined over the past thirty years; regional averages of CTR fell from the 35 percent to 55 percent prevailing in 1980 to 25 to 35 percent in 2009.
- Example: median corporate tax rate in the largest 19 OECD countries fell from 50 percent in 1982 to 34 percent by (text cut off).

*Source: _wp12252 - 2. Determinants of Corporate Tax Rates: Full Sample, OECD and non-OECD_; canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12252.pdf*

### 2003. At the same time, the cross-country variation in CT rates declined markedly: in 1982,

### _wp12252 - 2003. At the same time, the cross-country variation in CT rates declined markedly: in 1982,

### Decline in statutory corporate tax rates
- In 1982, half of the countries had statutory tax rates between 43.8 and 55 percent, a range of 11.2 percentage points.
- By 2003, that interquartile range had declined to 5.3 percentage points (CBO, 2005), and it fell further since then.
- The decreasing rates among OECD nations have left the United States at the top of the CTR table.
- Ireland and Iceland are noted as having dramatically cut their CTRs prior to their financial crises.
- Emerging markets and developing countries in Asia and Latin America have also experienced a lowering of corporate tax rates (evident in Figure 1 referenced in the source).

### Evidence on effective rates and firm behavior
- Hines (2005) highlights:
  - The average effective foreign tax rates of U.S. multinationals fell from 43 percent in 1982 to 26 percent in 1999.
  - In the early 1980s, small countries taxed corporate income at significantly lower rates than larger ones, but later there was no substantial difference between small and large countries.
- Devereux et al. (2007) find the decline in statutory rates is consistent with their theoretical model and is almost entirely explained by more intense competition following relaxation of capital controls.

### Trends in revenues despite lower rates ("Racing to raise revenues?")
- Corporate tax revenues have risen steadily over 30 years for the United States and all regions save for Sub-Saharan Africa (SSA); trend lines for all regions except SSA are upward sloping.
- EU example: corporate tax revenues as a percentage of GDP rose from 1.6 percent of GDP in 1980 to 3.4 percent in 2009.
- In emerging market economies, corporate taxes account for almost 20 percent of total tax revenue, the highest ever recorded.
- Explanations for rising corporate tax revenues despite lower statutory/effective rates (Kumar et al., 2007):
  - Broadening of the corporate tax base due to reduction of exemptions.
  - Corporate tax revenues are highly cyclical and were boosted by strong global growth and record-high profits prior to the global crisis.
  - Increased volatility of profits combined with imperfect loss offset provisions could boost collections.
  - Shift from personal income to corporate taxes (e.g., incentives for small businesses to incorporate; shifts from debt to equity financing) can increase corporate tax revenue.
- Quinn (1997) found capital account liberalization was associated with increasing corporate tax revenues, not erosion of the tax base; Krogstrup (2008) and Dreher (2006) produce related findings showing taxes on capital increase with globalization.

### Institutional and political constraints on tax competition
- Plümper, Troeger, and Winner (2009) argue fiscal rules and equity norms (measured by Gini coefficients) put upward pressure on effective capital taxation (both rates and revenue), moderating any pure “race to the bottom.”
- Cao (2010) emphasizes domestic political institutions (number of veto players, partisan politics, labor unions, corporatist decision making, electoral system) in influencing capital taxation; concludes CIT rates reflect domestic conditions and international strategic interactions.
- Hays (2003), Swank and Steinmo (2002), and Basinger and Hallerberg (2004) provide complementary findings on how political institutions and constraints shape tax policy choices.

### Alternative explanations for persistence of nonzero rates
- Several factors weaken the simple prediction that greater financial globalization implies ever-lower capital tax rates:
  - High costs of moving physical assets across countries mean production location is not automatically shifted by tax differentials.
  - Capital flows to where it is profitable, taking into account publicly provided services (infrastructure, public administration, law enforcement) and macroeconomic/political stability (Steward and Webb, 2006).
  - Corporate employees value quality public services (education, health care); higher taxes associated with better services may not prompt relocation.
  - Strategic considerations (Stackelberg leadership) where a "leader" country’s CIT rate influences follower countries’ rates.
- Kempf and Rota-Graziosi (2010) show tax rates are higher when countries move sequentially than simultaneously; Baldwin and Krugman (2004) assume larger or core country behaves as leader; Devereux et al. (2007) indicates large countries behave as leaders.

### U.S. tax policy and strategic implications
- Two major U.S. tax reforms under the Reagan administration altered corporate taxation domestically: the 1981 Economic Recovery Act and the Tax Reform Act of 1986, the latter reducing the U.S. top corporate statutory rate from 50 percent to 35 percent.
- U.S. policy is characterized as largely exogenous to international pressures (policy changes rooted in domestic beliefs and lobbying/campaign contributions).
- The United States taxes firms on a “worldwide” basis; residents are taxed on all income, whether derived abroad or at home, with foreign taxes credited upon repatriation (Joint Committee on Taxation, 2008, pp. 3–5, cited in the source).
- Strategic consequence: by taxing repatriated foreign income (with credit for foreign taxes), cuts in partner countries’ tax rates can increase U.S. Treasury revenue when U.S. firms repatriate profits.
- U.S. firms have “parked” roughly $1 trillion in “stranded profits” in tax havens (Drucker, 2011).

### Tax-havens, resource exporters, and heterogeneity across countries
- Countries identified as “tax havens” or “banking centers” exhibit different corporate tax dynamics (Gravelle, 2010).
- Corporate taxation in oil-exporting economies is likely to evolve differently from OECD economies due to strategic incentives and differing fiscal capabilities.
- Aizenman and Jinarak (2009) show lower income countries with weaker government capabilities have incentives to tap different revenue streams compared with wealthier emerging market countries with stronger fiscal capabilities.
- The relationship between financial globalization and corporate tax rates is not uniformly negative or monotonic; multiple domestic and international factors shape tax outcomes.

### Globalization and elite incentives (political economy of statutory rates)
- Average (statutory) corporate tax rates primarily affect the domestic corporate sector; the size and concentration of the domestic corporate base influence political organization for lower rates.
- Open-economy macro models contrast with domestic political-economy realities: in closed economies, capital holders are assumed fewer and outvoted by labor, yielding higher capital taxation in democracies (Boix, 2003 referenced).

*Source: Excerpt from IMF content unit _wp12252 - 2003. At the same time, the cross-country variation in CT rates declined markedly: in 1982,*

### Chapter 2).

### _wp12252 - Chapter 2)

### Elites, asset concentration, and corporate taxation
- Elites who own and manage corporations have a strong incentive to resist high rates of capital and corporate taxation.
- When tax policy has “public goods” properties, the logic of collective action applies: in a closed economy with concentrated capital asset ownership, elites are more likely to organize successfully to resist higher rates of capital taxation.
- In a closed economy with diffuse asset ownership, elites are less likely to organize and tax rates are likely to be higher.
- Elites in a closed economy are holders of an undiversified investment portfolio, with undiversified political risk; greater capital asset concentration increases the likelihood elites can organize to influence taxation.
- Concentrated elites are better able to use “voice” to reduce tax rates.

### Financial openness, diversification, and the shift from “voice” to “exit”
- Financial openness, especially capital account liberalization, enables domestic capital owners to form internationally diversified portfolios, in line with modern portfolio theory.
- Liberalizing capital account flows reduces elites’ ability or willingness to organize to influence domestic tax policy and exposes them to global tax rates they cannot organize to influence.
- Post-liberalization elites can diversify domestic political risk; in this context, “exit” becomes the main vehicle for influencing tax policy.
- Financial globalization changes the identity of domestic asset holders: international and native elites both hold assets, and international investors with diversified portfolios are likely to be less responsive to domestic tax policies than undiversified domestic holders.
- Asset concentration will condition the effect of financial globalization on corporate tax rates.
- Rising firm profitability from financial globalization could allow governments to raise tax rates without pronounced deleterious effects on competitiveness; numerous studies document that economic integration is associated with increasing firm profitability.

### Diffusion of ideas and global sentiment
- International economic reforms diffuse among countries; recent literature includes Cao, 2010; Chwieroth, 2007 and 2010; Henisz, Zelner, and Guillen, 2005; Quinn and Toyoda, 2007; and Swank, 2006.
- There is a global “sentiment” dimension regarding the role of markets versus governments that likely influences tax policy.
- Trends in personal income tax rates tracked trends in corporate income tax rates until the late 2000s (Loretz, 2008).
- Peter, Buttrick, and Ducan (2010), in a panel of 189 countries, demonstrated steady declines between 1981 and 2005 in top personal income tax rates.
- If tax rates on relatively immobile factors (people) track similarly to mobile factors (capital), forces beyond factor mobility—such as ideas about the merits of markets and governments—are likely at work.
- The collapse of the Soviet Union and the rejection of extreme socialism may have contributed to the discrediting of very high CIT regimes associated with socialist political economy frameworks.
- To account for diffusion of ideas, it is important to use a broad sample of advanced, emerging market, and developing countries and to include indicators of public sentiment.
- Footnote: For the authors’ purposes, the relevant countries are the Bahamas, Bahrain, Barbados, Hong Kong, Ireland, Mauritius, Panama, Singapore, and Switzerland. See Gravelle 2010.

### Hypotheses tested
- Main hypothesis (H1): Strategic considerations play a key role, and the degree of financial globalization (FG) interacts with this strategic aspect: for a given FG, governments with rates above the U.S. rate tend to cut rates, and governments with rates below the U.S. rate tend to raise rates.
  - H1: Home countries tax rates are set conditionally on the US corporate tax rate, with governments with rates above the US rate tending to cut rates, and governments with rates below the US rate tending to raise rates.
- Main null hypothesis (H2 as framed by authors): Home country tax rates are influenced by financial globalization at home and abroad. Contrary to some existing studies, the authors postulate that with global financial integration comes higher corporate profits and increased incentives for governments to maintain or (depending on US rates) raise corporate tax rates.
  - H2: Global financial openness will be associated with increasing corporate profitability and increased rates of profit taxation.
- Trade openness hypothesis:
  - H3: Increasing trade integration is associated with subsequently decreasing Corporate tax rates.
- Conditioning expectations:
  - Larger share of the corporate sector and higher asset concentration in closed economies => lower corporate tax rates.
  - Public sentiment and public opinion: increased preferences for equity and increased support for left-ideology => corporate tax rates increase.
- Footnote on distributional considerations: Even where a reduction in corporate tax rates might be warranted, distributional implications might preclude this (argument similar to tax reform more generally; see Auerbach and Hassett, 2005).

### Data, measures, and methodology (overview)
- Corporate tax rates and corporate tax revenues:
  - Constructed a panel with central government and general government tax rates.
  - For central government tax rates, there are 4,337 observations for 141 countries in a strongly unbalanced panel.
  - Matching these data to other data, usable data exist for 94 countries starting as early as 1953.

*Source: Chapter 2 of _wp12252 - Chapter 2).*

### 2009. The corporate tax revenue as percent of GDP has 2,048 observations, with no useable

### _wp12252 - 2009. The corporate tax revenue as percent of GDP has 2,048 observations, with no useable

### Data and data sources
- Corporate tax revenue as percent of GDP: 2,048 observations, with no useable observations prior to 1980 and ending in 2009; both series affected by frequent year-to-year gaps.
- Panel construction: 5-year annual panels (non-overlapping); 573 5-year averaged panels for up to 94 countries; panels are strongly unbalanced.
- Data sources:
  - Internal IMF sources from the Fiscal Affairs Department.
  - OECD Corporate Tax Database (II.1).
  - Annual corporate tax surveys from PriceWaterhouseCooper, Ernst and Young, and the University of Michigan Tax Center.
  - Government revenues as percent of GDP from IMF’s Government Finance Statistics (GFS) Database (noting a major gap from 1986 and 2001 GFS revisions).
  - UNIDO Version 2 manufacturing firm survey data for capital share (capital asset concentration).
  - Penn World Tables for domestic economic variables (growth, income per capita (ppp adjusted), population growth, trade openness, investment share, and government share of economy).
  - Financial development: liquidity (M3) as percent of GDP (updated Beck, Demirguc-Kunt, and Levine (2000)).
  - Financial globalization (de facto): Lane and Milesi-Ferretti (2007) international financial assets and liabilities (LogAssets, LogLiabilities; assets and liabilities measured as FDI and portfolio flows as percent of GDP); summed indicator: TOTAL.
  - Capital account openness (de jure): Quinn (1997), Quinn and Toyoda (2007) CAPITAL; GlobalCAPITAL is world average net of home country contribution.
  - Global anti-capitalist ideology: percentage of votes across countries garnered by Communist Parties (“CP votes”) for countries with free competition in secret balloting from 1949–52 through 2006 (23 countries in the data set: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Iceland, India, Ireland, Israel, Italy, Japan, Luxembourg, Malta, the Netherlands, New Zealand, Norway, Sri Lanka, Sweden, Switzerland, the United Kingdom, and the United States).

- Data limitations and adjustments:
  - Important limitations in UNIDO capital share: varying firm sample sizes within countries across years; omission of informal sector and small businesses can inflate capital share; differences in reporting (fringe benefits counted as wages in advanced economies) can bias capital share; agrarian sector omission; lower labor productivity in emerging markets affects wages.
  - To offset limitations and measurement error, 5-year averaged panels used; variables are differenced in GMM-system estimation to address persistence and endogeneity.

### Variables and measures (as used)
- Dependent variables (examples): Corporate Tax Rates (CTR), corporate tax revenue as percent of GDP.
- Key covariates:
  - Lagged dependent variables (five-year lagged averages).
  - Economic Growth, Income (ppp adjusted), Investment share, Trade Openness, EU Membership.
  - Communist Party Vote Share (global ideological sentiment).
  - Global Capital Account Openness (GlobalCAPITAL) and home country Capital Openness (CAPITAL).
  - Home country tax rate relative to U.S. tax rate: homeCTR - USCTR and its square (quadratic specification).
  - Financial globalization: LogAssets (outward FDI and portfolio flows as percent of GDP) and LogLiabilities (inward FDI and portfolio flows as percent of GDP); TOTAL = sum of these.
  - Capital share (CS) from UNIDO: CS = [1 - (Wages and Salaries / Value Added)] used as indicator of capital asset concentration.
  - Inequality: Gini coefficients with Dollar Kraay adjustments.

### Econometric models and estimation methods
- Modeling framework: pooled, cross-section, and time-series (PCSTS) models with 5-year non-overlapping intervals (index s: starting 1955–59 onward); units i = 1,2,...,93 (in model exposition).
- Core dynamic specification (differenced GMM-system):
  - ∆CTR_i,s = ß0 + ß1(∆CTR_i,s-1) + ß2(∆Economic Growth_i,s-1) + ß3(∆Income_i,s-1) + ß4(∆Investment_i,s-1) + ß5(∆Trade Openness_i,s-1) + ß6(∆Communist Party Vote Share_j-i,s-1) + ß7(∆Global Capital Account Openness_j-i,s-1) + ß8(∆Capital Openness_i,s-1) + ß9(∆EU Membership_i,s-1) + ε_i,s, i=1,2,...,93.
  - Additional terms include ß10(∆homeCTR-USCTR_i,s-1) and ß11(∆homeCTR-USCTR^2_i,s-1); second lag of dependent variable (ß2' (∆CTR_i,s-2)) included where necessary.
- Estimation choices and diagnostics:
  - OLS useful but subject to heteroskedasticity, persistence, endogeneity; OLS Model (3) reported as plagued by serial correlation.
  - GMM-system estimation (Arellano and Bover (1995); Blundell and Bond (1998)) used to address persistence and endogeneity; valid instruments help reduce measurement error; models estimated in PCGive 12.
  - Transformation: differencing of tax rates, revenues, and RHS variables to reduce persistence-induced bias.
  - Instruments: internal instruments for lagged endogenous variables are the third lags of levels and the second lag of differences of lagged endogenous variables; global variables treated as exogenous.
  - GMM system settings: 1-step estimates with robust standard errors; transformation set to “differences”; specification tests for two lags of serial correlation; absence of serial correlation indicated by negative statistically significant AB m1 test and no statistical significance on AB m2 test.
- Parameter heterogeneity explicitly allowed:
  - Distinct parameter estimates for OECD vs. non-OECD; tax havens and oil producers flagged; non-OECD non-oil nonbanking countries split into lower-income and higher-income groups with breakpoint at income of $1750 (2006 U.S. dollars chain-indexed).

### Factor analysis and underlying structure
- Factor analysis used to identify underlying components explaining correlations among regressors/regressands.
- Key findings:
  - Four well-identified factors account for roughly 70 percent of the variance in both sets of factor analyses (Table 1a and 1b).
  - Table 1a: Corporate Tax Rates load negatively on first and third factors (which account for 28 percent and 10.8 percent of variance, respectively); Corporate Tax Rates load positively with Communist Party Vote shares and opposite to Global Capital Openness on the first factor; load negatively, in contrast to Trade Openness, on the third factor.
  - Table 1b (broader variable set, 45-percent reduction in observations and omission of pre-1975 period): Corporate Tax Rates load negatively on the second factor (19 percent of panel variance), in opposition to Trade Openness, Inward Investment (Liabilities), and Outward Investment (Assets); Communist Party Vote Shares and Global Capital Openness load positively and negatively on a single factor as a high level (>.9).
- Implication: corporate tax rates are part of an underlying dimension representing facets of international integration; higher taxes in this dimension relate negatively to other processes of integration; causal relationships between international integration variables and corporate tax rates are not straightforward because they are facets of a common underlying variable at a point in time.

### Main empirical results and quantitative findings
- General scatterplot evidence (Figures 4–8):
  - Y-axis: country’s change in corporate tax rate in period s (e.g., 2005–09).
  - X-axis: home country’s tax rate in prior period s–1 minus the U.S. CTR in same prior period.
  - Core expectation: countries respond to U.S. tax rate in revenue-maximizing manner; clustering in northwest (below U.S. rate then raising) and southeast (above U.S. rate then cutting).
  - Over time: shift from northwest clustering to southeast clustering; by 2000–09 no country occupied northeast quadrant (taxes higher than U.S. subsequently raising them); significant number occupied southwest quadrant in 2000–09 (rates below U.S. and decreasing subsequently).
  - Relationship approximately quadratic (−X + −X-squared) with clustering around U.S. rates.

- GMM-System Model (Table 2 and related results):
  - Strong and highly statistically significant positive coefficient on global ideological sentiment (Communist Party vote share): as the vote share of the world’s communist party decreased (increased) by 1 percent, corporate tax rates subsequently decreased (increased) by 3–5 percent.
  - Given the roughly 4½ point drop in communist party voting, the corresponding estimated drop in tax rates is in the 14–22 percent range.
  - Positive and highly statistically significant coefficient on global capital account openness: movement from lowest to highest values of global capital account openness translates into a 6–12 percent increase in corporate tax rates.
  - Home country capital account openness indicator statistically significant only in OLS estimates (which suffer serial correlation).

- Heterogeneity across country groupings (Tables 3 and 4; Figure 9):
  - Parameter heterogeneity observed across five groups: nonbanking OECD, wealthier emerging markets, low-income emerging markets, oil exporters, and banking centers.
  - Quadratic home vs U.S. tax rate relationship estimated; marginal effects plotted with statistical significance bands (Figure 9).
  - Nonbanking OECD: large gaps above U.S. rate lead to subsequent drops. Example: a country 20 points higher than U.S. predicted to drop by 8 points relative to U.S. in subsequent period (example cited: Sweden). A country 15 points below U.S. predicted to increase by roughly 5 points subsequently.
  - Emerging market nations: curve accelerates down faster above U.S. rate.
  - Lower-income countries: estimated effects only in ranges substantially below U.S. rate (capital income often limited government revenue source).
  - Banking center countries: estimated line mostly below zero; they do not raise taxes above U.S. rate (line not statistically significant in observed ranges).

- Capital share, inequality, and interaction with financial globalization (Table 5):
  - Sample and data limitations: capital share data too sparse for oil, banking center, and lower-income groups; models reported: full sample (1 and 2), non-OECD (3 and 4), OECD (5 and 6); interactions between capital account openness and capital share estimated in Models 2, 4, and 6.
  - OECD countries:
    - Higher levels of share of corporate sector in value added associated with increasing corporate taxation (Model 5).
    - Interaction term between capital share and capital account openness not statistically significant.
    - Inequality (Gini with Dollar Kraay adjustments): beta coefficient on Gini positive and statistically significant beyond the .05 level (model not reported).
    - Implication: among OECD, higher inequality or larger share of corporate value added associated with higher corporate taxation.
  - Non-OECD countries:
    - Statistically significant negative association between corporate value added share and corporate tax rates in closed-economy ranges (Model 3).
    - Quantified effects:
      - In a closed economy, a 10-point increase in capital share is associated with a 2-percent decrease in corporate tax rates.
      - As a non-OECD economy becomes more financially open, marginal effects of capital share diminish and turn positive.
      - Statistically significant negative marginal effects of capital share found only in the 0–55 range (out of 100) for capital account openness.
      - For a completely open emerging market economy (capital = 100), the marginal effect of an increase in corporate value added is positive and statistically significant but modest: a 10-percent increase in corporate value added is associated with a subsequent 0.7-percent increase in tax rates.

### Other notable empirical and methodological notes
- OLS, random effects, and fixed effects models produce substantively similar results in full sample, but fixed effects models have relatively few observations per instrument—focus is on random effects and GMM-system estimations.
- GMM-system estimations exhibit good statistical properties where serial correlation diagnostics pass (differencing and instrument strategy).
- The paper emphasizes the complexity of causal identification given factor structure and collinearity among international integration variables and corporate tax measures.

*Italic: Source: IMF working paper content unit provided.*

### CONCLUSIONS

### CONCLUSIONS

### Main empirical findings
- Scope and data: analysis based on a unique and comprehensive sample of advanced, emerging, and low-income economies over the past five decades yields the following key results:
- Financial globalization (FG) and corporate tax (CT) rates/revenues:
  - "There is no negative relationship between the extent of FG and corporate tax rates and revenues."
  - "Across some groups of OECD and non-OECD countries, an increase in FG is highly statistically significantly associated with a subsequent upward movement in corporate tax rates and revenues."
  - The upward association reflects both rising profitability attendant on globalization and domestic political economy factors (desire for portfolio diversification by domestic corporate elites).
  - "However, the greater the trade openness, the lower the CT rates."
  - "There is little evidence that overall higher global financial market integration leads to downward pressure on corporate tax rates."
- U.S. leadership and cross-country convergence:
  - Robust evidence of a form of "Stackelberg" leadership by the United States: deviations from U.S. corporate tax rates, up or down, are not sustained over the longer term.
  - "Rather than a race to the bottom, if rates are below those in the United States, there is a move toward the U.S. rates across a broad range of country groupings."
- Home vs. U.S. taxation and corporate tax revenues (Appendix Table 1):
  - For OECD countries, revenues increase with tax rate increases up until the increases exceed the U.S. rates, after which revenues attenuate.
  - The authors note: "This is an area for further research."
- Global sentiment and correlated trends:
  - A clear role is played by "global sentiment" relating to the role of markets and the corporate sector; belief in the primacy of markets has exerted a clear downward influence on corporate tax rates (Figure 10).
  - "Global average tax rates on 'immobile' factors (individuals) and 'mobile' factors (corporations) have trended in the same direction and are very highly correlated: global forces beyond 'strategic competition' are clearly at work."
  - The authors mark this as "an area for further research."
- Domestic political economy:
  - The corporate sector, particularly in closed emerging market economies, has a strong preference for lower tax rates.
  - "The greater the role played by capital (and the greater concentration of capital) in production in a closed economy, the lower the rate of taxation."
  - With openness, the role of capital in the productive process and its concentration diminishes; openness gives firms and owners incentives to seek diversified portfolios internationally, reducing domestic firms' ability and incentive to push for lower rates.
  - The paper states: "We believe that this is the first demonstration of the effects of capital share concentration on corporate tax policy in closed economies."
- Other empirical regularities:
  - Positive relationship between government expenditures and corporate tax rates and collections.
  - "Higher growth, presumably through a reduction in budgetary revenues, leads to subsequent lower CIT rates."
  - "The smaller the population, ceteris paribus, the higher the rates."

### Policy implications and scenarios
- Complexity of CT-setting:
  - CT rate setting is more complex than simple competition or a "race to the bottom" model; powerful domestic and global factors interact with financial globalization.
  - "This is, of course, not to say that there are no empirical regularities regarding the determination of CTs, but rather that the process is richer and less straightforward than some of the literature suggests."
- Globalization and policy maneuver:
  - "Globalization per se does not reduce the degree of policy maneuver."
  - Conversely, rolling back globalization "would not effectively increase flexibility in the setting of CT rates."
- Fiscal pressures and U.S. policy externalities:
  - After the global crisis and with severe budgetary pressures in many advanced economies, balancing various considerations makes CIT rate decisions more difficult.
  - U.S. policy plays a crucial role: given U.S. budgetary pressures, an increase in the U.S. rate "would allow some welcome flexibility to nudge rates higher in many other economies."
  - Conversely, "were there to be any pronounced cuts in U.S. rates ... this is likely to have sizable adverse externalities for many economies, particularly those that are facing even larger fiscal pressures."

### Areas highlighted for further research
- The dynamic effects of home vs. U.S. taxation on revenues (noted in Appendix Table 1).
- The correlated global trend of tax rates on immobile and mobile factors and the role of global sentiment beyond strategic competition.
- The novel finding on capital share concentration's effect on corporate tax policy in closed economies.

*Source: CONCLUSIONS, _wp12252.*

### Appendix Table 2. Country Classification

### Appendix Table 2. Country Classification

### Country classifications
- Emerging Market Upper Income
  - Albania
  - Argentina
  - Bolivia
  - Brazil
  - Bulgaria
  - Chile
  - Colombia
  - Costa Rica
  - Czech Republic
  - Dominican Republic
  - Egypt
  - Fiji
  - Guatemala
  - Honduras
  - Hungary
  - Israel
  - Ivory Coast
  - Jamaica
  - Jordan
  - Korea
  - Malaysia
  - Mexico
  - Paraguay
  - Peru
  - Philippines
  - Poland
  - Romania
  - Russia
  - Salvador
  - Slovakia
  - South Africa
  - Thailand
  - Tunisia
  - Turkey
  - Uruguay

- Emerging Market Lower Income
  - Bangladesh
  - Botswana
  - Burkina
  - Cambodia
  - Cameroon
  - China
  - Congo (Republic of the)
  - Ethiopia
  - Ghana
  - Haiti
  - India
  - Kenya
  - Laos
  - Madagascar
  - Mozambique
  - Myanmar
  - Nepal
  - Pakistan
  - Rwanda
  - Senegal
  - Sierra Leone
  - Sri Lanka
  - Sudan
  - Syria
  - Tanzania
  - Uganda
  - Vietnam
  - Zambia
  - Zimbabwe

- OECD Non-bank Tax Havens
  - Australia
  - Austria
  - Belgium
  - Canada
  - Denmark
  - Finland
  - France
  - Germany
  - Iceland
  - Ireland
  - Italy
  - Japan
  - Netherlands
  - New Zealand
  - Norway
  - Portugal
  - Spain
  - Sweden
  - United Kingdom
  - United States

- OPEC
  - Bahamas
  - Bahrain
  - Barbados
  - Hong Kong
  - Indonesia
  - Libya
  - Mauritius
  - Nigeria
  - Panama
  - Saudi Arabia
  - Singapore
  - Trinidad and Tobago
  - Venezuela
  - Iran
  - Iraq
  - Ecuador
  - Gabon

- Standalone/other entries appearing in the table layout
  - Hong                                  Kong
  - 42

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*Appendix Table 2. Country Classification*

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