DP7159 Are Your Firm's Taxes Set in Warsaw? Spatial Tax Competition in Europe
|Author(s):||Karen Crabbé, Hylke Vandenbussche|
|Publication Date:||February 2009|
|Keyword(s):||corporate taxes, fiscal reaction function, Spatial tax competition|
|JEL(s):||H25, H39, H77|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=7159|
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.