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Abstract

This paper tests the central predictions of the theoretical tax competition literature for capital tax rates for a panel of European Union countries, notably a race to the bottom in capital tax rates. One measure of capital mobility is found to exhibit a downward pressure on capital taxes while another measure shows a positive correlation. Empirical tests imply that the latter positive relationship may be caused by neglecting to control for the agglomeration forces linked with capital mobility. If this is indeed the case, the results lend strong empirical support to the hypothesis of a downward pressure on capital tax rates in absolute terms and relative to labor taxes, but add to this that agglomeration forces mitigate, and might even outweigh the race to the bottom effect of increasing capital mobility.

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