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Are your firm's taxes set in Warsaw? Spatial tax competition in Europe

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  • Karen Crabb?
  • Hylke Vandenbussche

Abstract

Corporate tax rates in Europe have been falling rapidly; as a consequence tax competition within the EU is fiercer than in the rest of the OECD. 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, in principle 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 physically closer to Central-Europe experienced more tax competition. Next we use a spatial regression framework to more formally test the hypothesis that distance to a low tax region affects countries' tax reaction functions.

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Bibliographic Info

Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 21608.

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Date of creation: 2008
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Handle: RePEc:lic:licosd:21608

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

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References

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Cited by:
  1. Nelly Exbrayat & Benny Geys, 2011. "Trade Integration and Business Tax Differentials : Theory and Evidence from OECD Countries," Working Papers 1123, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  2. Markus Leibrecht & Claudia Hochgatterer, 2012. "Tax Competition As A Cause Of Falling Corporate Income Tax Rates: A Survey Of Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 26(4), pages 616-648, 09.
  3. Michael Devereux & Simon Loretz, 2012. "What do we know about corporate tax competition?," Working Papers 1229, Oxford University Centre for Business Taxation.
  4. Novy, Dennis, 2012. "International Trade without CES: Estimating Translog Gravity," CAGE Online Working Paper Series 101, Competitive Advantage in the Global Economy (CAGE).

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