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Zero Corporate Income Tax in Moldova: Tax Competition and Its Implications for Eastern Europe

Author

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  • Marcin Piatkowski
  • Mariusz Jarmuzek
Abstract
Global economic integration intensified tax competition and raised concerns about the resulting "race to the bottom", which could undermine public investment and social spending. The aim of this paper is to test predictions that (i) there is interdependence in CIT rate setting in Eastern Europe and that (ii) the recent CIT cut in Moldova may intensify tax competition in the region. It finds that there is indeed evidence that during 1995-2006 countries in Eastern Europe strategically responded to changes in CIT rates in the region and that Moldovan zero CIT is likely to encourage further cuts in CIT. The paper also discusses implications of tax competition for Eastern Europe and finds that FDI flows will not be much affected, tax revenues are likely to decline, the shift in the composition in tax revenue may increase economic efficiency, but decrease equity. Tax coordination, while difficult politically, could help stem further decline in corporate taxation, but any gains might be modest and not certain to exceed the costs of tax coordination. Without tax coordination, however, it is unclear what exactly could stop corporate taxes from falling further.

Suggested Citation

  • Marcin Piatkowski & Mariusz Jarmuzek, 2008. "Zero Corporate Income Tax in Moldova: Tax Competition and Its Implications for Eastern Europe," IMF Working Papers 2008/203, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2008/203
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    Cited by:

    1. Nedelchev, Miroslav, 2010. "Корпоративно Управление На Финансови Групи (Спазвай И Обяснявай) [Corporate Governance of Financial Groups (Comply and Explain)]," MPRA Paper 52249, University Library of Munich, Germany.
    2. International Monetary Fund, 2008. "Kingdom of the Netherlands: Netherlands: Selected Issues," IMF Staff Country Reports 2008/172, International Monetary Fund.
    3. Ms. Elif C Arbatli Saxegaard, 2011. "Economic Policies and FDI Inflows to Emerging Market Economies," IMF Working Papers 2011/192, International Monetary Fund.
    4. Daianu, Daniel & Kallai, Ella & Lungu, Laurian, 2012. "Tax Policy under the Curse of Low Revenues: The Case of Romania (Part I)," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 156-186, March.
    5. Pınar COMUK & Serkan ERCOSKUN & Gokce KAFKAS, 2022. "The Effect of Corporate Tax on Foreign Direct Investments: A Panel Study for Turkey and European Union Countries," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 1, pages 82-86.
    6. Filoso, Valerio, 2010. "The Corporate Income Tax: An Entrepreneurial Perspective," MPRA Paper 42967, University Library of Munich, Germany.

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    Keywords

    WP; CIT rate; rate; tax rate; tax; tax revenue;
    All these keywords.

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