Editorial
On the occasion of the 65th birthday of Governor Klaus Liebscher and in recognition of his commitment to Austria’s participation in European monetary union and to the cause of European integration, the Oesterreichische Nationalbank (OeNB) established a “Klaus Liebscher Award”. It will be offered annually as of 2005 for up to two excellent scientific papers on European monetary union and European integration issues. The authors must be less than 35 years old and be citizens from EU member or EU candidate countries. The “Klaus Liebscher Award” is worth EUR 10,000 each. The winning papers of the forth Award 2008 were written by Kerstin Gerling and by Aleksandra Riedl and Silvia Rocha-Akis (shared award). Kerstin Gerling’s paper was presented in Working Paper 141, while the second contribution is contained in this Working Paper.
In this paper Aleksandra Riedl and Silvia Rocha-Akis test one of the fundamental assumptions in the tax competition literature, namely, that a country’s taxable income depends on the tax policies pursued in the domestic and in neighbouring countries. Based on a panel of annual data of 14 Western European countries spanning the period 1982 to 2004 the authors show that the common trend in falling corporate income tax (CIT) rates can in part be explained by the existence of fiscal externalities in the form of international resource flows. The results confirm the presumption put forward in recent empirical tax reaction function studies, that interdependent tax setting behaviour is evidence of tax competition. However, taxable corporate income is shown to react inelastically to domestic and to foreign tax rates. Thus, the authors claim that the observed rise in CIT revenues in Europe between 1982 and 2004 cannot be explained by the trend in falling CIT rates. Moreover, they find that large countries’ tax bases are more responsive to neighbouring countries’ tax policies, which is in contrast to the classic asymmetric tax competition literature.