Tax competition in an expanding European Union

This paper empirically examines whether expansion of the EU has increased
international tax competition. To do so, we use a simple model of tax competition to
determine how a given country weights the taxes of others when choosing its own tax.
This indicates that the market potential of a country (which includes both domestic
consumption and exports) is the appropriate weight. This is an improvement on the adhoc
and often endogenous weighting schemes used elsewhere. Unlike those studies, we
find robust evidence for tax competition. In particular, our estimates suggest that EU
membership affects responses with EU members responding more to the tax rates of
other members. This lends credence to the above-noted concerns.