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Competition from Low-wage Countries and the Decline of Corporate Tax Rates: Evidence from European Integration

Authors


  • This paper was completed while the second author was a Visiting Researcher at the Tepper School of Business at Carnegie-Mellon University. The authors would like to thank the Tepper School for its hospitality and the German Research Foundation (DFG) for financial support. We would also like to thank Peter Egger, Johannes Voget, an anonymous referee, and the participants of the Workshop on Taxation of Multinationals at the CESifo Venice Summer Institute 2008 for their comments. The usual disclaimer applies.

Abstract

We exploit the rapid economic integration of Eastern and Western Europe after 1989 as a natural experiment to assess the effect of international competition for mobile capital on corporate tax rates. By means of a series of difference-in-difference estimations, we show that Western European countries which have been directly exposed to neighbours in Eastern Europe have reacted to the intensified competition by cutting their corporate tax rates by 8.1 to 10.5 percentage points relative to those countries which do not share a common border with countries in Eastern Europe. It seems that this effect has mainly worked through Eastern European countries offering lower wages and less through competition over corporate tax rates.

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