The Tax Competition in Turbulent Times: The Race to the Bottom in European OECD Economies

This paper examines the effectiveness of competitive tax policies in attracting foreign direct investment (FDI) within European OECD economies, considering the role of corporate income tax as a key instrument. Beyond statutory tax rates, the analysis incorporates tax base breadth and tax incentives, which are crucial tools employed by national governments to influence FDI flows, more specifically, effective average tax rate (EATR). This resulted in a "race to the bottom" for tax competitiveness. However, the success of these competitive tax policies must be assessed in the context of economic turbulences, including the 2007–2009 Global Financial Crisis, the 2010–2014 Debt Crisis, and the 2020–2021 Pandemic crisis. The research analyses whether the impact of tax competition on FDI diminishes in times of turbulent environment. To address this, the research employs subsamples covering different (crisis) periods, applying Panel-Corrected Standard Errors (PCSE) to ensure robust estimation. Findings indicate that the effectiveness of tax competition in attracting FDI declines during crises, suggesting that economic shocks have a stronger influence on FDI inflows than tax policy changes. This highlights the need for policymakers to consider broader macroeconomic stability alongside fiscal incentives when designing tax policies to attract investment.