Are your firm's taxes set in Warsaw?Spatial tax competition in Europe

Tax competition within the EU is fiercer than in the rest of the OECD with tax rates fallingrapidly. This paper analyzes tax responses of EU-15 countries to corporate tax changes in theEU-10 new member states as a function of their proximity to these new member states. Theaverage corporate tax rate in the new member states has always been considerably lower than theaverage in the EU-15 countries. Their entry into the EU eliminated capital barriers, allowingfirms to locate in one of the new EU-10 with full access to the European Market. Our resultsindicate that EU-15 countries geographically closer to the new member states respond stronger tocorporate tax changes in these new member states. We use a theoretical and a spatial regressionframework to test the hypothesis that distance to a low tax region intensifies countries’ taxreaction functions.....