This paper provides a simple theoretical model of capital tax competition between
countries that di¤er in spatial location, and where cross-border investment
costs are proportional to distance (a gravity model). We model EU membership
as a reduction in ‘distance’ between countries. Precise predictions about reaction
functions’ intercepts and slopes are derived. In particular we …nd that joining the
Union lowers tax reaction function’s intercept and that all countries react more to
member countries than they do to non-members. These predictions are largely con…
rmed using a panel data set of statutory corporate tax rates on Western European
countries
