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

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  • Michael Overesch
  • Johannes Rincke

Abstract

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. Copyright 2009 The Author. Journal compilation 2009 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal World Economy.

Volume (Year): 32 (2009)
Issue (Month): 9 (09)
Pages: 1348-1364

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Handle: RePEc:bla:worlde:v:32:y:2009:i:9:p:1348-1364

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Cited by:
  1. Ronald B Davies & Krishna Chaitanya Vadlamannati, 2011. "A Race to the Bottom in Labour Standards? An Empirical Investigation," Working Papers, School Of Economics, University College Dublin 201123, School Of Economics, University College Dublin.
  2. Michael Overesch & Johannes Rincke, 2011. "What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 113(3), pages 579-602, 09.
  3. Janeba, Eckhard & Osterloh, Steffen, 2013. "Tax and the city: A theory of local tax competition and evidence for Germany," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 12-005 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Adam, Antonis & Kammas, Pantelis & Lagou, Athina, 2013. "The effect of globalization on capital taxation: What have we learned after 20years of empirical studies?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 35(C), pages 199-209.
  5. Osterloh, Steffen & Debus, Marc, 2012. "Partisan politics in corporate taxation," European Journal of Political Economy, Elsevier, Elsevier, vol. 28(2), pages 192-207.
  6. Johannes Becker & Ronald B. Davies, 2013. "Learning and international policy diffusion: the case of corporate tax policy," Working Papers, Oxford University Centre for Business Taxation 1319, Oxford University Centre for Business Taxation.
  7. Mittermaier, Ferdinand & Rincke, Johannes, 2013. "Do countries compensate firms for international wage differentials?," Journal of Public Economics, Elsevier, Elsevier, vol. 102(C), pages 23-36.

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