Corporate income taxation and external balances in the European Union

Abstract

This study examines the impact of corporate taxation on the external balances of 27 European Union member countries from the late 1990s to 2021. Using an ARDL process and a 2-stage least squares estimation procedure, we find that, in the short term, higher corporate taxation is positively and significantly related to the current account balance and the trade balance for the whole sample. There are considerable differences in the effects in the euro area and non-euro countries, with the latter experiencing a much stronger short-term impact. In the long term, there are no critical differences in the results between the two groups, and the impact of corporate taxation is positive but statistically significant only for the trade balance. The size of the impact of corporate taxation on net exports and current account balances is of similar magnitude, which likely implies that the international profit shifting via manipulating intrafirm prices in international trade does not strongly affect the external balances in our sample. Our results imply that initiatives to increase global tax rates could be justified from an international trade perspective.