Are Your Firm's Taxes Set in Warsaw? Spatial Tax Competition in Europe
KU Leuven - Department of Economics
Catholic University of Leuven (KUL), LICOS & CEPR
CEPR Discussion Paper No. DP7159
Tax competition within the EU is fiercer than in the rest of the OECD with tax rates falling rapidly. This paper analyzes tax responses of EU-15 countries to corporate tax changes in the EU-10 new member states as a function of their proximity to these new member states. The average corporate tax rate in the new member states has always been considerably lower than the average in the EU-15 countries. Their entry into the EU eliminated capital barriers, allowing firms to locate in one of the new EU-10 with full access to the European Market. Our results indicate that EU-15 countries geographically closer to the new member states respond stronger to corporate tax changes in these new member states. We use a theoretical and a spatial regression framework to test the hypothesis that distance to a low tax region intensifies countries' tax reaction functions.
Number of Pages in PDF File: 29
Keywords: corporate taxes, fiscal reaction function, Spatial tax competition
JEL Classification: H25, H39, H77
Date posted: February 18, 2009
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