Tax Competition in an Expanding European Union
Ronald B. Davies (University College Dublin)
Johannes Voget (Oxford University Centre for Business Taxation)
At the 2009 International Institute of Public Finance (IIPF) congress in Cape Town in August, the authors of this paper received the IIPF 'Young Economist Award' for the best paper presented at the congress by authors under the age of 40.
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 ad-hoc 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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