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Competition from Low‐wage Countries and the Decline of Corporate Tax Rates: Evidence from European Integration
Author(s) -
Overesch Michael,
Rincke Johannes
Publication year - 2009
Publication title -
world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/j.1467-9701.2009.01214.x
Subject(s) - competition (biology) , economics , tax competition , corporate tax , international economics , wage , natural experiment , western europe , difference in differences , international trade , demographic economics , labour economics , tax reform , european union , ad valorem tax , market economy , tax avoidance , ecology , biology , statistics , mathematics , econometrics
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.