Abstract
It pays to be a tax haven. Ireland has become rich that way. Why do not all countries cut their capital taxes to get wealthy? One reason is structural. As the standard model of tax competition explains, small countries gain from competitive tax cuts while large countries suffer. Yet not all small (large) countries have low (high) capital taxes. Why? The reason, we argue, is political. While the standard model assumes governments to be democratic, more than a third of countries world-wide are non-democratic. We explain theoretically why autocracies are less likely to adjust to competitive constraints and test our argument empirically against data on the corporate tax policy of 99 countries from 1999 to 2011.
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