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

  • Crabbé, Karen
  • Vandenbussche, Hylke

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7159.

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Date of creation: Feb 2009
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Handle: RePEc:cpr:ceprdp:7159
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