Globalisation, capital mobility and tax competition : theory and evidence for OECD countries

Are the predictions of tax competition theory wrong? Recent empirical results on capital taxation suggest that this might be the case. While tax competition literature predicts that capital taxes decrease with increasing globalisation, empirical studies on various data find contradicting evidence. By using different data and additional elements of economic theory, this paper aims to challenge the empirical contributions. For a panel of 14 OECD countries and the period 1967-96, we find that globalisation has indeed a negative and significant impact on corporate taxes. Furthermore, globalisation tends to raise labour taxes and social expenditures. As a consequence, the so-called "efficiency" and "compensation" hypotheses of globalisation are not competing, they both appear to apply at the same time: efficiency has an impact on the tax-mix whereas compensation is provided through increased social expenditures.