IMF Working Paper No. 08/203
Zero Corporate Income Tax in Moldova:
Tax Competition and Its Implications for Eastern Europe
||Piatkowski, Marcin | Jarmuzek,
|Authorized for Distribution:
||August 1, 2008
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Summary: Global economic integration intensified tax competition and
raised concerns about the resulting "race to the bottom", which could
undermine public investment and social spending. The aim of this paper is to
test predictions that (i) there is interdependence in CIT rate setting in
Eastern Europe and that (ii) the recent CIT cut in Moldova may intensify tax
competition in the region. It finds that there is indeed evidence that
during 1995-2006 countries in Eastern Europe strategically responded to
changes in CIT rates in the region and that Moldovan zero CIT is likely to
encourage further cuts in CIT. The paper also discusses implications of tax
competition for Eastern Europe and finds that FDI flows will not be much
affected, tax revenues are likely to decline, the shift in the composition
in tax revenue may increase economic efficiency, but decrease equity. Tax
coordination, while difficult politically, could help stem further decline
in corporate taxation, but any gains might be modest and not certain to
exceed the costs of tax coordination. Without tax coordination, however, it
is unclear what exactly could stop corporate taxes from falling further.
|Disclaimer: This Working
Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s)
and do not necessarily represent those of the IMF or IMF policy.
Working Papers describe research in progress by the author(s) and
are published to elicit comments and to further debate.