Are Your Firm's Taxes Set in Warsaw? Spatial Tax Competition in Europe

Abstract:     
Tax competition within the EU is fiercer than in the rest of the OECD with tax rates falling rapidly. This paper analyzes heterogeneity in corporate tax rate changes between EU-15 countries as a function of the proximity to the EU-10 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 Central-Europe experienced more tax competition. We use a spatial regression framework to empirically test the hypothesis that distance to a low tax region affects countries' tax reaction functions.

Number of Pages in PDF File: 26

Keywords: Spatial tax competition, Corporate taxes, fiscal reaction function

JEL Classification: H25, H77, H39

working papers series