Tax competition in European Union: An empirical analysis

The globalization movements that emerged in the ends of 20th century force countries to change their tax policies. Accordingly, the countries have started to compete on taxation in order to get more share from foreign capital. In this sense, tax competition can be defined as a reduction in tax rates in order to attract foreign caiptal into the country, or as efforts to reduce tax burden by providing a number of tax advantages besides tax rates. In our study, the existence of tax competition is tested by panel data analysis for the period of 1995-2015 for 28 European Union countries. The conclusion we came at our current study is as follows: There is a negative relationship between corporate tax and direct foreign investments, and a positive relationship between political instability in the countries and direct foreign investments. Also, there is a positive relationship between the size of the countries and the corporate tax rate. Besides, the ratio of the tax revenues on capital to the tax revenues on labour is negatively correlated with openness and GDP. Finally, there is a positive relationship between the openness and corporate tax rates. These results show that the European Union countries, especially the small countries, are resorting to tax competition.