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Fiscal Interactions Among European Countries: Does the EU Matter?

Michela RedoanoCSGR Working Paper Series No. 222/07 

March 2007

Abstract: We use a panel of European countries to investigate whether or not governments interact with their neighbours when they decide their fiscal policy; we consider both taxes and expenditures, at aggregate and as separate aspects of policy. We analyse possible different competitive behaviours and find evidence of fiscal interdependencies consistent with the literature on tax and yardstick competition. For corporate taxes, the regression results suggest that European countries follow large countries in order to attract capital; for income taxes and public expenditures, instead, fiscal interactions exist but they are mainly due to yardstick competition. Finally, we have found the countries are interdependent with each other before joining the EU, and that, once they are in, they become more independent. Keywords:

Spatial correlation, Yardstick competition, Tax competition, Intergovernmental Relations, International fiscal issues, Regionalisation

JEL Classification: H2, H77, H87, D7Contact Details:

Michela Redoano

CSGR, Social Studies

Warwick University

Coventry, CV4 7AL (UK)

Michela.Redoano@warwick.ac.uk