Working Paper: CEPR ID: DP7159
Authors: Karen Crabb; Hylke Vandenbussche
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.
Keywords: Corporate Taxes; Fiscal Reaction Function; Spatial Tax Competition
JEL Codes: H25; H39; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| NMS tax changes (H29) | tax rates of neighboring EU15 countries (H29) |
| distance to low tax region (H29) | tax reaction functions (H20) |
| Germany tax rates (H29) | Poland tax rates (H29) |
| geographical distance (R12) | tax premiums (H29) |
| tax rates of EU14 countries (H29) | NMS tax rates (H29) |