Tax competition among European countries. Does the EU matter?

- We model of tax competition between countries that differ in spatial location.
- Cross-border investment costs are proportional to distance.
- EU membership reduces effective distance between countries.
- The model predicts that joining the EU affect countries' reactivity to tax choices.
- These predictions are confirmed using a panel of Western European countries.

This paper provides a simple theoretical model of capital tax competition between countries that differ in spatial location, and where cross-border investment costs are proportional to distance (a gravity model). We model EU membership as a reduction in 'distance' between countries. Precise predictions about reaction functions' intercepts and slopes are derived. In particular we find that joining the Union lowers the intercept and that all countries react more to member countries than they do to non-members. These predictions are largely confirmed using a panel data set of statutory corporate tax rates on Western European countries.