Has EU expansion encouraged tax competition?
EU expansion has increased the mobility of capital and business to a wider range of countries. The newer member states tend to have lower corporation tax rates, and a more aggressive attitude towards tax competition, as they seek to attract greater inward investment. Because these countries are now EU members, it is plausible that EU expansion has stimulated international tax competition within the EU. This project investigates whether there is evidence that this has occurred. It is clearly the case that corporation tax rates have fallen throughout the EU, and that they are considerably lower in new member states. This project finds robust evidence that EU member states respond more to the tax rates of other members than to non-EU countries. This is consistent with EU expansion exacerbating tax competition, helping to drive down corporation tax rates in the EU, and ultimately elsewhere as well. The authors of this paper won the ‘Young Economist Award’ at the 2009 Congress of the International Institute of Public Finance, for the best paper presented at the Congress by authors under the age of 40.