Peter Egger, Michael Pfaffermayr and Hannes Winner
The academic evidence for competition between countries in setting corporation tax rates is well established. But until now, there have been no studies considering whether there is competition in other taxes. The project tests the hypothesis that there is also competition in attracting unincorporated businesses through income tax rates.
Based on data from OECD countries over the last 10 years, the project finds substantial evidence of tax competition in both income tax rates and corporation tax rates.
Further, it finds that these taxes are substitutes for each other. If corporation tax rates in other countries fall, a country will respond by reducing its corporation tax rate and raising its income tax rate. If income tax rates in other countries fall, a country will respond by reducing its income tax rate and raising its corporation tax rate.