DP7159 Are Your Firm's Taxes Set in Warsaw? Spatial Tax Competition in Europe

Author(s): Karen Crabbé , Hylke Vandenbussche

Publication Date: February 2009

Keyword(s): corporate taxes , fiscal reaction function , Spatial tax competition

JEL(s): H25 , H39 , H77

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP7159.asp.asp

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.