Do Asia and Pacific countries compete in corporate tax rates?

Do governments in the emerging Asia and Pacific region independently set corporate tax rates? This paper answers the question and contributes to the growing empirical tax competition literature by (1) generating a predictable tax reaction function considering the lumpy' nature of economic geography; (2) using GMM to estimate the tax reaction functions using panel data of 14 countries in the Asia and Pacific region between 1980 and 2007. We find evidence of strategic fiscal policy interaction. Globalization has positive effects on the interactive policy setting. Country size has also positive effect but the effects are offset when the openness deepens. Furthermore, a substitution relation between capital and labor is implied. Overtime, countries in the Asia and Pacific region seem to become more competitive in corporate tax rates.