Tax Competition and Employment

Abstract

We find a negative relation between corporate tax rates and export levels, and between corporate tax rates and investment by multinational firms’ foreign subsidiaries. These results suggest that changes in foreign tax rates can affect product market competition in a domestic country by changing the nature of import competition and competition from foreign-owned peer firms. Using cross-border trade statistics and multinational firm ownership data, we find that decreases in foreign tax rates relative to the domestic tax rate negatively affect employment at domestic firms ex ante exposed to import competition and competition from foreign-owned peers. The effect is greater for domestic firms with no foreign operations, given their lack of international tax planning and diversification opportunities, and for domestic firms that are more sensitive to product market competition.

Keywords: Tax competition, Competition, Employment, Real effects, Trade

JEL Classification: E24, F14, F16, H23, H35