How mobile is capital within the European Union?

Joeri Gorter and Ashok Parikh

Research memoranda from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: The key result of the tax competition literature is that governments set inefficiently low tax rates on income from internationally mobile production factors. Therefore, there is a case for coordination of EU capital income taxes, provided that capital is mobile within the EU. We measure how the international allocation of capital depends on taxation by examining the relation between FDI positions and effective corporate income tax rates. An EU country typically increases its FDI position in another EU country by approximately four percent if the latter decreases its effective corporate income tax rate by one percentage point relative to the EU mean. This conditionally support the recent efforts of the EU to coordinate capital income taxation. The benefits or costs of tax coordination ultimately depend, however, on whether one views the government as a social welfare maximising agent or tax revenue maximising leviathan.

Keywords: foreign direct investment; tax; taxes; tax competition; tax coordination (search for similar items in EconPapers)
JEL-codes: H25 H26 H32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ifn and nep-pbe
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Persistent link: http://EconPapers.repec.org/RePEc:cpb:resmem:172

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