FDI Determination and Corporate Tax Competition in a Volatile World

This paper investigates the impact of economic and political volatility on corporate tax rates on a large dataset of countries over the 1983–2003 period. Estimation of a dynamic tax rate equation supports the hypothesis that economic volatility negatively affects statutory corporate tax rates, while political volatility has no significant effect. In order to identify the channels through which volatility works, we estimate a structural model allowing for simultaneous determination of corporate tax rates and FDI inflows, and find that economic volatility affects the corporate tax setting process through its impact on FDI inflows.