Competition from Low-Wage Countries and the Decline of Corporate Tax Rates: Evidence from European Integration

17 Pages Posted: 15 Oct 2009

See all articles by Michael Overesch

Michael Overesch

Universität zu Köln

Johannes Rincke

Ludwig Maximilian University of Munich (LMU); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Abstract

We exploit the rapid economic integration of Eastern and Western Europe after 1989 as a natural experiment to assess the effect of international competition for mobile capital on corporate tax rates. By means of a series of difference-in-difference estimations, we show that Western European countries which have been directly exposed to neighbours in Eastern Europe have reacted to the intensified competition by cutting their corporate tax rates by 8.1 to 10.5 percentage points relative to those countries which do not share a common border with countries in Eastern Europe. It seems that this effect has mainly worked through Eastern European countries offering lower wages and less through competition over corporate tax rates.

Suggested Citation

Overesch, Michael and Rincke, Johannes, Competition from Low-Wage Countries and the Decline of Corporate Tax Rates: Evidence from European Integration. World Economy, Vol. 32, Issue 9, pp. 1348-1364, September 2009. Available at SSRN: https://ssrn.com/abstract=1489084 or http://dx.doi.org/10.1111/j.1467-9701.2009.01214.x

Michael Overesch (Contact Author)

Universität zu Köln ( email )

Albertus-Magnus-Platz
WiSo-Gebäude
Cologne, 50923
Germany
0221/470-5605 (Phone)

HOME PAGE: http://www.steuer.uni-koeln.de/

Johannes Rincke

Ludwig Maximilian University of Munich (LMU) ( email )

Seminar for Economic Policy
Akademiestr. 1/II
Munich, D-80799
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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