The effect of the corporate tax rate on the trade balance

Abstract

Past research indicates that MNCs may be engaging in income shifting practices. Such practices could bias the trade balance, if the intrafirm trade is substantial. This article examines the effect of the tax differential on the trade balances of OECD countries. The results indicate that the trade balance is adversely affected when the tax differential is positive, for a number of countries.

Notes

¹ For example, Soyoung (2001) utilizes a VAR approach in examining the effects of the monetary innovations on the trade balance.

² Operating surplus is defined as: Gross output at producer's value less intermediate consumption, compensation of employees, consumption of fixed capital and indirect taxes reduced by subsidies.

³ According to Pricewaterhouse Coopers (2001), the only OECD countries that adopt progressive rates are Belgium, Japan, Korea, the United Kingdom and the United States.

⁴ The progressive tax structure for Japan and the USA appears to dominate the results, therefore these countries were eliminated from the results. Note, in Table 2, that the remaining trade share is still large even without these countries.

⁵ Because of the possibility that the variables in the regression may be nonstationary we also tested the residuals in Table 2 for stationarity. All residuals were found to be stationary, thus avoiding a possible spurious regressor problem. See Yoshimine and Norrbin (2004) for details.