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Learning and international policy diffusion: the case of corporate tax policy

Author

Listed:
  • Johannes Becker

    (University of Münster)

  • Ronald B. Davies

    (University College Dublin)

Abstract
A recent empirical literature has arisen documenting the response of one nation?s policy choices, including tax, environmental, and labour policies, to that of others. This has been largely interpreted as evidence of competition, be it for mobile resources (like FDI, taxable book income etc.) or yardstick. We present a third explanation based on learning. When countries ?tax choices refl?ect private information about unobserved conditions, this encourages nations to update their policies not in order to retain investment or manipulate trade flows, but because the new information conveyed by overseas tax rates allows them to fi?ne-tune their own policies. With this ?social learning?, countries converge on their optimal policies faster than in isolation. Furthermore, this convergence implies a pattern of policy convergence often attributed to competition for mobile resources. The speed of this convergence is smaller in the presence of policy adjustment costs although it remains faster than convergence in isolation. In addition, adjustment costs result in inefficient policy adjustment because countries do not internalize the benefi?ts conveyed by their own adjustments to other nations. Finally, we show that these baseline results are robust to alternative network architectures, the choice of which can be used to replicate stylized facts found in the empirical tax competition literature.

Suggested Citation

  • Johannes Becker & Ronald B. Davies, 2013. "Learning and international policy diffusion: the case of corporate tax policy," Working Papers 1319, Oxford University Centre for Business Taxation.
    • Handle: RePEc:btx:wpaper:1319
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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/Series_13/WP1319.pdf
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    References listed on IDEAS

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    Cited by:

    1. Blesse, Sebastian & Martin, Thorsten, 2015. "Let's stay in touch - evidence on the role of social learning in local tax interactions," ZEW Discussion Papers 15-081, ZEW - Leibniz Centre for European Economic Research.
    2. Hawley, Zackary & Rork, Jonathan C., 2015. "Competition and property tax limit overrides: Revisiting Massachusetts' Proposition 2½," Regional Science and Urban Economics, Elsevier, vol. 52(C), pages 93-107.

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    More about this item

    Keywords

    social learning; tax competition;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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