What determines corporate tax rates? The role of economic and political factors

Corporate tax rates have declined substantially over the last decades. Despite this decline there is still large variation in rates between countries. Several studies have investigates factors determining corporate tax rates. These studies tend to focus either on economic factors – such as size, openness, and strategic interaction – or on political factors – such as ideology, election year, presidential or parliamentary regime. This paper combines both sets of factors explaining corporate tax rates across OECD countries. Moreover, and unlike most previous studies we focus on the political process – that is how decisions are made – rather than on ideology of the ruling party. More specifically we investigate what determines corporate tax rates in OECD over the period 1982 - 2010.  Preliminary results indicate a strong relationship between corporate tax rates and political process. Among the economic determinants we find size and openness to be important, in line with previous research. Especially, we find that larger countries in Europe tax corporate income at higher rates than smaller countries – the same pattern does not hold for the full OECD sample. We also find strong evidence of strategic interaction among governments’ tax policies meaning that other countries tax rates influence tax rates in a country. This is especially true for statutory corporate tax rates.