Policymakers’ term limits and corporate income tax competition in a growing economy with international knowledge spillover

This paper studies corporate income tax competition in a two-country R&D-based growth model with international knowledge spillovers, non-Ricardian households, and policymakers with finite political horizons. The analysis isolates two forces shaping the Nash equilibrium tax rate. A shorter policy horizon induces governments to favor current wages financed by productive public spending over long-run growth, pushing tax rates upward. International knowledge spillovers create a tax-competition channel whose direction depends on spillover strength: weak spillovers encourage tax cuts to attract firms, whereas stronger spillovers make governments less concerned about losing firms and support higher productive public spending financed by corporate income tax revenue. Quantitatively, welfare losses are large in the benchmark spillover case because these forces reinforce each other, but small under weak spillovers because tax competition offsets the finite-horizon effect. The model further shows that welfare losses differ between Ricardian and non-Ricardian households and that differences in policy horizons affect cross-country welfare losses.