Is Eastern Europe to Blame for Falling Corporate Taxes in Europe?

• Published in: East European politics and societies Vol. 30; no. 4; pp. 855 - 884
• Main Authors: Tudor, Carissa L, Appel, Hilary
• Format: Journal Article
• Language: English
• Published: Berkeley Sage Publications Ltd 01.11.2016
• Subjects: Competition; Coordination; Corporate taxes; Economic factors; Effectiveness; Europe; Globalization; Income; Income tax; Political factors; Reform; Tax deductions; Tax rates; Tax reform; Taxation; Taxes; Eastern Europe
• ISSN: 0888-3254; 1533-8371
• DOI: 10.1177/0888325416663834

When a dozen new countries joined the European Union in the mid-2000s, political tensions spiked over disparities in corporate income tax rates. Since the time of enlargement, leaders have tried repeatedly to enhance corporate tax coordination within the EU, as a result of fears of downward pressure on corporate tax rates and states' weakening ability to collect revenues. At the same time, leaders from new member states in Eastern Europe with low corporate tax rates have contended that regional efforts to coordinate tax policies are not worthwhile, given that corporate tax competition is a global phenomenon. This article argues that corporate tax competition is more acute at the regional than the global level. While corporate tax rates are falling inside and outside the EU, we demonstrate using a large multiyear, multiregional data set that Eastern European countries have extremely low corporate tax rates relative to other EU and non-EU countries, even when controlling for multiple domestic economic and political factors. These findings support the potential efficacy of pursuing regional corporate tax reform to address the downward spiraling of rates in the EU.