Are the tendencies of the race to the bottom real in the European Union?

Abstract

The increasing globalization and integration of markets are one of the causes of tax competition. Even though tax competition may be beneficial for some countries, on the other hand for others states it may mean an erosion of their public budgets. The Member States are therefore forced to compete for a capital by a reducing of the tax burden (especially a cutting of the corporate effective tax rates) to don’t lose their tax bases. At present time of the debt crisis, when most of the Member States look for a solution to a balance of their deficit budgets, there a question arises whether a tendency towards a cutting of corporate effective tax rates does not lead to a race to the bottom and the erosion of their public budgets. In this context, the aim of this paper is to answer whether the race to the bottom is real in the European Union. This paper empirically evaluates the level of the race to the bottom in the European Union and using panel analysis it verifies on a sample of 27 Member States over the period 1998 to 2010 whether the tendencies of the race to the bottom are real. According to the panel analysis this paper concludes that the tendencies of the race to the bottom are particularly evident in the new Member States, i.e. in the EU-12 countries, while for the old Member States, i.e. for the EU-15 countries, the race to the bottom cannot be statistically confirmed.