ABSTRACT
European monetary integration has paved the way for increased tax or fiscal competition between European Union (EU) Member States. The elimination of exchange rate risk stimulates the mobility of capital income and the increasing mobility provides an incentive for tax or fiscal competition within the EU. This chapter analyses how taxes on labour income affect labour costs in Europe. It determines to what extent taxes on employee labour income influence national and regional pre-tax real wages in nine EU member states: Belgium, France, Germany, Italy, the Netherlands, Portugal, Spain, Sweden and the United Kingdom, for the period of 1984-1993. The national tax rate equations are estimated according to the method proposed by Padoa-Schioppa Kostoris using annual time series data. The tax rate equation does not only incorporate the tax progressiveness on labour income, but also the degree of fiscal indexation.
