Are Small Countries Leaders Of The European Tax Competition ?

The aim of this paper is to develop a better understanding of the literature dealing with strategic fiscal behaviours of small EU countries using estimations of tax reaction functions of competing national governments. Deriving simple model of tax competition in a Nash and a Stackelberg game, the authors use panel data and tools from spatial econometrics to examine the role of small countries in tax competition within the enlarged European Union. They find that interactions are stronger among smaller EU countries than between larges ones and rates set in small countries influence those in big countries. Finally, small countries located in the centre of the EU have more influence on tax policies choices of big countries than small countries located in the periphery of EU.