Club convergence in the corporate income tax: The case of European effective rates

Abstract

The corporate income tax is permanently under debate in recent decades with respect to coordination and competition issues, including the race-to-the-bottom hypothesis, and the effects on investment and economic growth of such a distortionary tax. In this paper we study the evolution of the effective corporate tax rates in the European Union through a convergence analysis, identifying common trends by a club convergence approach. The results evidence three clubs, with the high-tax-rate-club formed by France, Malta, Spain and Portugal. In addition, and compared with the results for the statutory corporate tax rates, important differences arise, showing the significance of the fiscal benefits in this tax and the distance between both tax rates in many European countries. Our results are also analysed in the fiscal harmonization framework.