Are Tax Rates Converging in the European Union?
Mark C. Strazicich
April 30, 2010
Abstract
Objectives: Tax rates in the European Union (EU) are examined to see if they are converging among member countries. Given that the mobility of taxable resources would be expected to increase in the EU, tax competition could stimulate a convergence in tax rates toward the average of the member countries.
Data/Methods: Unit root tests with structural breaks are first utilized to test if tax rates are stochastically converging. Stochastic convergence implies that the natural log of the ratio of each individual country tax rate to the EU mean tax rate will be a stationary series. Structural breaks are included to avoid potential bias and to identify breaks in the convergence process. However, while stochastic convergence is a necessary condition for convergence it is not sufficient. Therefore, after identifying those countries where tax rates are stochastically converging, time series regressions are performed to test the time series notion of beta convergence. If tax rates are converging, then, in general, the coefficient on the intercept and trend should have opposite signs. Testing is performed using annual data from 1965-2008.
Results/Expected Results: The results provide evidence that tax rates are converging among a majority of the EU countries. In addition, structural breaks are often identified around the time period of membership in the EU. Overall, these findings provide support to the notion that EU membership is associated with greater resource mobility and converging tax rates.
Keywords: Taxation; Convergence; Structural Breaks
JEL Classifications: E62, C22
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Mark C. Strazicich, Department of Economics, Appalachian State University, Boone, North Carolina 28608-2051, Telephone: 828-262-6124, Email: strazicichmc@appstate.edu.