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

  • Karen Crabb?
  • Hylke Vandenbussche

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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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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