Tax Reform in Open Economies
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Tax Reform in Open Economies

International and Country Perspectives

Edited by Iris Claus, Norman Gemmell, Michelle Harding and David White

The eminent contributors (including Altshuler, Creedy, Freebairn, Gravelle, Heady, Kalb, Sørensen and Zodrow) investigate the beneficial directions for medium-term tax reform in the light of global developments and lessons from the latest taxation research. In addressing this issue, they review recent advances in both the theoretical and empirical tax literature and reform evidence from individual countries. Topics covered include the impact of taxes on economic performance; international and corporate taxation; personal tax and welfare systems; environmental taxation; and country-specific tax reform experiences.
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Chapter 6: International Taxation and Company Tax Policy in Small Open Economies

George R. Zodrow


George R. Zodrow* INTRODUCTION 6.1 Company tax policies around the world are in a state of flux, as many countries have reformed their corporate income tax systems in response to the ongoing process of globalisation, in an environment characterised by highly mobile international capital, international tax competition, and aggressive international tax avoidance by many multinational corporations (MNCs).1 This environment is especially difficult for countries that can approximately be characterised as small open economies, that is, countries that face a perfectly elastic supply of capital at a rate of return that is determined in international capital markets as well as fixed prices for internationally traded goods; New Zealand is often characterised as an especially open economy (New Zealand Treasury, 2008). Tax competition for highly mobile capital has placed downward pressure on company tax rates, as countries strive to be competitive in attracting highly prized and highly mobile capital investments, especially those that promote the transfer of technology and have the potential of increasing productivity and growth rates, and New Zealand is no exception (New Zealand Inland Revenue Department, 2008). At the same time, however, such pressure is countered by a variety of factors, including arguments for taxing relatively immobile investments that generate economic rents at high rates and for aligning tax rates under the corporate and personal income tax systems to limit opportunities for domestic tax avoidance. In addition, increasingly aggressive efforts at tax avoidance, especially by large multinational corporations, further complicate the issue. This chapter examines company income tax...

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