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Modeling tax competition in developing countries: a theoretical and empirical analysis

Date

2021

Authors

Nguyen, Hiep Quang, author
Mushinski, David, advisor
Braunstein, Elissa, committee member
Pena, Anita, committee member
Kroll, Stephan, committee member

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Abstract

While much attention has been paid in the literature to tax competition in developed countries, little research has focused on tax competition among developing countries. These two groups of countries are very different, even opposite in many aspects of tax competition. One cannot apply research results in developed countries to developing countries. This dissertation fills that gap in current literature. The paper develops theoretical models of tax competition for developing countries and empirically tests the theoretical results using a sample of data from developing countries. The paper discusses an asymmetric tax competition model where countries are different in capital, labor, total factor productivity, investment in public inputs, unemployment rate and foreign aid. The paper provides insights into the existence of tax competition and the impact of the several variables on tax competition in developing countries. The empirical models test theoretical results with dataset from 63 developing countries. A spatial econometric model is used to estimate tax competition in developing countries. The paper found several theoretical and empirical results related to tax competition in developing countries that have not been addressed in previous literature. Unemployment rate and foreign aid affect tax competition in multiple ways. Foreign aid can create both tax competition and fiscal competition. Tax competition is stronger in high unemployment rate countries. The results also confirm the existence of tax competition in developing countries in both statutory and effective corporate tax rates. Countries compete differently over these two rates. Productivity, investment in public inputs, trade openness, education, exchange rate and population variables affect tax competition behavior in developing countries. With theoretical and empirical results, the paper presents several policy implications for governments in developing countries. Appropriate tax competition policies provide developing countries the opportunities to attract more investments and to gain faster economic growth.

Description

2021 Summer.
Includes bibliographical references.

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