The Impact of International Tax Competition on Low and Middle-Income Countries

States compete with tax schemes to attract portfolio capital, profits of international operating corporations, foreign direct investment (FDI) and high income jobs. The literature on low and middle-income countries (LMICs) focusses mainly on tax competition and its impact on where multinationals pay their profit taxes and the flows of FDI. It shows that LMICs are more dependent on corporate tax revenues than high-income countries and that resource rich LMICs show a high volatility on their corporate tax revenues. Over the last three decades, both LMICs and high-income countries have lowered their statutory corporate income tax rates - smaller countries even more so than larger ones. At the same time, due to trade liberalisation, taxes on trade have also been low.