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

Tax competition within the EU is fiercer than in the rest of the OECD, with EU tax rates falling rapidly. This paper analyzes whether countries in the enlarged EU respond differently to EU15 countries' corporate tax rates and to new members' corporate tax rates. The average corporate tax rate in the new member states has always been considerably lower than the average in the EU15 countries. The new members' entry into the EU eliminated capital barriers, allowing firms to locate in one of the new member states with full access to the European Market. We use a spatial regression framework to test the hypothesis that tax reactions among European countries are asymmetric. Our results only find significant tax interaction between EU15 countries and new member states. This suggests that EU15 countries responded to corporate tax changes of their neighboring new member states during the period 1990–2009.