Ota Paper 101: A Review Of The Evidence On The Incidence Of The Corporate Income Tax - William M. Gentry (Office Of Tax Analysis, Us Department Of The Treasury) Page 30
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42Building a general equilibrium model that accounts for tax competition requires modeling
how tax policy in one country responds to changes in tax policy in other countries. This naturally
leads to considering strategic interactions among governments. If governments act in an
uncoordinated fashion, one might conclude that capital income taxes will not survive in an open
economy with relatively small countries (see, e.g., Gordon, 1992). The possible negative
consequences of tax competition suggest that governments may want to foster institutions that
will help coordinate tax policies across countries.
The policy implications of tax competition depend on whether a government thinks that
its change in tax policy will induce other countries to change their tax policies. For example, a
high-tax country reducing its tax rate to the average tax rate of other countries might engender a
different response than a country with an average tax rate aggressively lowering its tax rate. For
corporate tax incidence, the size of the tax policy response of other countries will determine
whether capital actually flows across borders in response to a tax change. For example, if the US
reduces its corporate tax rate and other countries do not change their tax rates, then the US is
likely to attract more capital (so that labor will benefit from higher wages); in contrast, if the
other countries respond to a US tax cut by cutting their tax rates, then the capital inflows might be
relatively modest.
IV.
Corroborating Empirical Evidence
The empirical papers surveyed above suggest that labor bears a substantial burden from
the corporate tax and this shifting may occur even in the short run. The general equilibrium
models also suggest that labor can bear a considerable burden from corporate taxation. The
extensions to the general equilibrium model considered in the previous section do not refute the
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