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

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  • Crabbé, Karen
  • Vandenbussche, Hylke

Abstract

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.

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  • Crabbé, Karen & Vandenbussche, Hylke, 2009. "Are Your Firm's Taxes Set in Warsaw? Spatial Tax Competition in Europe," CEPR Discussion Papers 7159, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7159
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    Citations

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    Cited by:

    1. Ronald B. Davies & Johannes Voget, 2008. "Tax competition in an expanding European Union," Working Papers 200904, School of Economics, University College Dublin.
    2. Michael P. Devereux & Simon Loretz, 2013. "What Do We Know About Corporate Tax Competition?," National Tax Journal, National Tax Association, vol. 66(3), pages 745-774, September.
    3. 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, September.
    4. Michela Redoano, 2007. "Fiscal Interactions Among European Countries. Does the EU Matter?," CESifo Working Paper Series 1952, CESifo Group Munich.
    5. Suzuki, Masaaki, 2014. "Corporate effective tax rates in Asian countries," Japan and the World Economy, Elsevier, vol. 29(C), pages 1-17.
    6. Peter Egger & Horst Raff, 2015. "Tax rate and tax base competition for foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 777-810, October.
    7. Nelly Exbrayat & Benny Geys, 2011. "Trade Integration and Business Tax Differentials: Theory and Evidence from OECD Countries," Post-Print halshs-00617043, HAL.
    8. Masaaki Suzuki, 2013. "Corporate Effective Tax Rates in Asian Countries," KIER Working Papers 875, Kyoto University, Institute of Economic Research.
    9. Åsa Hansson & Susan Porter & Susan Williams, 2015. "The importance of the political process on corporate tax policy," Constitutional Political Economy, Springer, vol. 26(3), pages 281-306, September.
    10. Redoano, Michela, 2014. "Tax competition among European countries. Does the EU matter?," European Journal of Political Economy, Elsevier, vol. 34(C), pages 353-371.

    More about this item

    Keywords

    corporate taxes; fiscal reaction function; Spatial tax competition;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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