Central European governments are rightly betting that slashing their base corporate tax rates will attract more direct foreign investment (FDI). As the 1 May 2004 date of EU enlargement approaches the race to the bottom is heating up.
Five of the 10 accession countries—the Czech Republic, Slovakia, Poland, Hungary and Latvia—have proposed or passed tax cuts in the past five months. The present 15 EU member states have an average corporate tax rate of nearly 32 per cent; in the candidate countries, if current legislation is passed, the rate will be nearly half that, at 17 per cent on average.
A University of Warwick study found that a 1 per cent decline in a country's corporate tax rate increased the probability of a firm locating in that country by 1 per cent.
