Taxing choices: international competition, domestic institutions and the transformation of corporate tax policy

Abstract:

Since the 1980s, notable corporate tax base broadening and rate reductions have occurred throughout the rich democracies. Scholars agree that tax competition for mobile assets shapes this transformation. I address two questions in this article. First, what form has tax competition taken and, second, how have domestic institutions conditioned competition's impact? I build on past work and argue that tax competition is characterized by the (Stackelberg) leadership of the United States as opposed to alternative forms of competition. At the same time, domestic institutions, especially the degree to which the nation is a co-ordinated versus liberal market economy, are central determinants of the pace of reform. I test these propositions with models of 1982–2008 tax rate change in 18 capitalist democracies. I find that rising trade openness and capital mobility place downward pressures on tax rates, the United States' adoption of the neoliberal tax model engenders significant competitive responses from other nations, and that the institutions of co-ordinated economies slow the pace of neoliberal reforms. High public debt, left-leaning median voters and institutional veto points also significantly constrain tax policy change. I conclude with some reflections on tax policy in the wake of the global financial crisis and on neoliberalism and institutional change in advanced democratic capitalism.