Partisan politics and tax competition for foreign investment

National governments face a dilemma: they want to provide an attractive environment to the multinational investors by lowering the corporate tax rates. At the same time, they want to maintain the tax base to protect the losers from the globalization. This dilemma is the starting point of this study. Here I explore the patterns of the corporate tax competition for foreign investment both in the developed as well as in the developing countries. A revised theory of partisan politics is developed to explain the patterns of the corporate tax competition. Traditionally, a left-wing party often promotes redistribution through taxation, while a right-wing party promotes the efficiency of the market by minimizing the size of the government. The proposed theory of partisan politics shows that a left-wing party pursues a conservative low tax policy similar to a right-wing counterpart when the tax base is not big enough to fund the redistribution. If the left-wing government is not able to collect tax revenue necessary for the redistribution, it has no choice but to extend the tax base for the redistribution. However, if the tax base is big enough, a left wing party pursues standard high-tax large-spending policy. This policy is clearly different from the policy preferred by the right-wing party.;This new version of partisan theory for corporate tax competition is empirically tested using a dataset that covers both developed as well as developing countries. Different control variables are incorporated in the empirical models accounting for the political and economic characteristics of the countries.;The theory is, then, applied to explain the effect of veto players on the corporate tax competition. According to the neoliberal paradigm, tax cut is a necessary strategy to attract foreign investment. But, the domestic partisan veto players might find such neoliberal reforms costly, and then, try to block them. If there are a large number of leftwing veto players in a country, a neoliberal tax reform is politically difficult. The theory proposed here, however, implies that this argument is conditionally correct, because, given a tiny tax base, veto players from the left-wing parties prefer not to block a neoliberal tax reform. The ideal points of the left-wing veto players get close to the ideal points of the right-wing veto players, reducing the political cost of the tax reform. However, the left-wing veto players imposes significant amount of political cost on the neoliberal tax reform when a country has a large source of capital taxation. They prefer to collect more tax revenue from the corporations with redistribute policy agenda. This argument is tested in the context of the developed and the developing countries. The effect of the veto players disappears when the tax base is tiny, but the effect is significant when a country has a large source of capital taxation.