One prominent result of tax competition theory is that competitive pressure varies with country size: in competitive equilibrium, small countries ndercut the taxes of large countries. Does this result change if we introduce differences in political regime type? The question has not been asked because previous research has largely focused on tax competition among advanced Western OECD-countries, i.e. among democracies. However, tax competition is a global phenomenon that potentially also affects autocracies. We hypothesize that autocratic regimes have less to gain from tax competition than democracies because they have greater difficulty to credibly commit not to expropriate foreign investors. We explore two implications. First, the tax rates of autocratic countries are less sensitive to country size than those of democracies: Small autocracies do not undercut large autocracies to a significant degree. Second, small autocracies wishing to profit from tax competition have to democratize. Whatever its negative fiscal effects, tax competition has a positive political effect on the regime type of small countries. Tax havens are not usually autocracies.
