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Tax Competition in an Expanding European Union

  • Ronald B. Davies and Johannes Voget

This paper empirically examines whether expansion of the EU has increased international tax competition. To do so, we use a simple model of tax competition to determine how a given country weights the taxes of others when choosing its own tax. This indicates that the market potential of a country (which includes both domestic consumption and exports) is the appropriate weight. This is an improvement on the adhoc and often endogenous weighting schemes used elsewhere. Unlike those studies, we find robust evidence for tax competition. In particular, our estimates suggest that EU membership affects responses with EU members responding more to the tax rates of other members. This lends credence to the above-noted concerns.

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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp276.

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Date of creation: 15 Jan 2009
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Handle: RePEc:iis:dispap:iiisdp276
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  1. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo Group Munich.
  2. Jim Markusen & Caroline Ekholm, Rikard Forslid, 2005. "Export-Platform Foreign Direct Investment," The Institute for International Integration Studies Discussion Paper Series iiisdp050, IIIS.
  3. Bruce A. Blonigen & Ronald B. Davies & Glen R. Waddell & Helen T. Naughton, 2004. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment," NBER Working Papers 10939, National Bureau of Economic Research, Inc.
  4. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Investment in the European Union," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 959-972, November.
  5. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics.
  6. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer, vol. 10(2), pages 107-26, March.
  7. Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2005. "Estimating Models of Complex FDI: Are There Third-Country Effects?," Center for Policy Research Working Papers 73, Center for Policy Research, Maxwell School, Syracuse University.
  8. Alexander Klemm & Stefan Parys, 2012. "Empirical evidence on the effects of tax incentives," International Tax and Public Finance, Springer, vol. 19(3), pages 393-423, June.
  9. Markusen, James R & Maskus, Keith E, 2002. "Discriminating among Alternative Theories of the Multinational Enterprise," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 694-707, November.
  10. Simon Loretz, 2008. "Corporate taxation in the OECD in a wider context," Oxford Review of Economic Policy, Oxford University Press, vol. 24(4), pages 639-660, winter.
  11. Aisbett, Emma & Karp, Larry & McAusland, Carol, 2006. "Regulatory Takings and Environmental Regulation in NAFTA's Chapter 11," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt1qh5j6dv, Department of Agricultural & Resource Economics, UC Berkeley.
  12. Andreas Haufler & Alexander Klemm & Guttorm Schjelderup, 2006. "Globalisation and the Mix of Wage and Profit Taxes," CESifo Working Paper Series 1678, CESifo Group Munich.
  13. Axel Dreher, 2003. "The Influence of globalization on taxes and social policy - an empirical enalysis for OECD countries," Discussion Papers 0301, Exeter University, Department of Economics.
  14. Rosanne Altshuler & Timothy J. Goodspeed, 2002. "Follow the Leader? Evidence on European and U.S. Tax Competition," Departmental Working Papers 200226, Rutgers University, Department of Economics.
  15. Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2002. "Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment," NBER Working Papers 8929, National Bureau of Economic Research, Inc.
  16. Bruce A. Blonigen & Ronald B. Davies & Helen T. Naughton & Glen R. Waddell, 2005. "Spacey Parents: Spatial Autoregressive Patterns in Inbound FDI," NBER Working Papers 11466, National Bureau of Economic Research, Inc.
  17. Ronald B. Davies, 2002. "Hunting High and Low for Vertical FDI," University of Oregon Economics Department Working Papers 2002-12, University of Oregon Economics Department, revised 01 Aug 2002.
  18. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  19. Andrew Rose, 2005. "Which International Institutions Promote International Trade?," Review of International Economics, Wiley Blackwell, vol. 13(4), pages 682-698, 09.
  20. Michael Devereux & Rachel Griffith, 1996. "Taxes and the location of production: evidence from a panel of US multinationals," IFS Working Papers W96/14, Institute for Fiscal Studies.
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