Is International Capital Tax Competition Fueled by the Quest for Increased Productivity?

This paper examines the relationship between capital tax competition amongst countries and the productivity spillover effects from foreign capital movements. An econometric model is constructed to test for the impact that domestic and foreign productivity shocks has on a country's tax setting behavior. The paper empirically tests this using a spatial dynamic panel data model with system GMM, utilizing a dataset consisting of 41 countries spanning the years of 1998-2012. This study finds evidence that foreign productivity level changes are having a negative impact on domestic tax rates. In addition, this paper also finds support for the idea that countries competitively set their tax rates in response to foreign countries tax setting decisions.