The response of companies to differences in corporate tax rates encourages states to lower the level of corporation tax by lowering the tax rate or reducing the tax base in variously relief or investment incentives. In Europe in particular, almost continuous reduction in the average corporate tax rate. This development started in the late 1980s and accelerated for some time in the 21st century in theater European countries joined the EU. The rate of decline has been high on average½ percentage points per year. However, the reduction in tax rates is likely to be partly explained also with a view to reducing the other harmful effects of corporation tax.
Tax competition research has shown that small and remote countries incentives to lower the tax rate are higher than for large and key investors. For the Estimated business taxes you need to choose the best.
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Small countries can benefit from lowering the tax rate on their territory relatively speaking, a lot of activity. Increase in economic activity compensates for the loss of tax revenue due to the reduction in the tax rate. Greaten the case of a country, the cost of lowering the tax rate can again be relatively high the benefit of lowering the tax rate. According to studies, countries can maintain higher taxes because they have economic activities benefits from proximity to the market and economic activity accumulation (agglomeration) even if corporate tax is high, companies will not out of the area because operating revenues are higher there than in the nuclear outside the EU.
In the light of theory, the more aggressive in tax competition are small lands on the outer edge of the agricultural areas. This is also in line with practice Germany, the USA, France and Italy have maintained higher levels of Community such as the Netherlands, Ireland, Eastern European countries and the Nordic countries. Econometric research on the subject also supports this notion.
In an open economy, therefore, corporation tax has a very different effect than in a closed economy. Domestic companies are no longer dependent on the needs of domestic savers.
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As a result, domestic capital gains tax and the corporate tax connection are reduced. Personal income tax is mainly affected household savings and the content of the asset portfolio, while corporate taxa there are still a clear link to corporate investment. They include high corporate tax investments, domestic relocation and profit reporting at home. It follows that the level of corporation tax can have a significant effect not only for investment but also for domestic corporate tax collection.
These effects largely related to the fact that, in an international environment, corporate tax into the country of origin principle. Due to the investment impact, the tax burden will not fall investors but employees. In the open economy, corporate tax is largely a tax on labor. But, on the other hand, an inefficient way of taxing labor income, as it lowers the country ‘sown resources and thus, in addition to the purchasing power generated by labor, productivity and wage levels.