Partisan Politics in Corporate Tax Competition

The broad literature focussing on the effects of globalization and strategic interactions on corporate tax competition has widely neglected an impact of political factors. In this paper, we analyse the effects of political factors on corporate taxation and in particular the impact of partisanship. In a first step we show in a simple theoretical Zodrow/Mieszkowski-style framework how political ideologies can impact on decisions on corporate tax rates. Assuming heterogeneous decision-makers driven by self-interest in the political outcome and a probabilistic voting model, two channels can be identified which point at different tax reaction functions of left-wing and right-wing politicians: differences in public good preferences as well as ideological biases in the perception of capital mobility. Both channels imply that rightwing incumbents set lower corporate tax rates. In the empirical section we make use of highly sophisticated data on ideological positions. These are derived from the Comparative Manifesto Project (CMP) data set, which is based on the content analysis of party manifestos. This data enables much more sophisticated analyses of partisan politics than the data usually applied in public finance. Applying panel data for 32 European countries since 1979, we can detect a significant positive effect of left-wing legislatures on corporate tax rates. This effect, however, is diminishing over time. Beyond this ideological effect, we identify two further political factors which have interfered with the general pressure on cutting tax rates: the fragmentation of government, as well as the educational background of the respective head of government. Moreover, our analysis by means of disaggregated ideology measures reveals that especially the parties' attitude towards the welfare state is a most relevant factor which has a strong positive effect on corporate tax rates.

Osterloh, Steffen and Marc Debus (2009), Partisan Politics in Corporate Tax Competition, ZEW Discussion Paper No. 09-078, Mannheim.