The internal market in Europe will greatly increase the international mobility of resources. How will this affect fiscal policy in different countries? We consider taxation of capital in a two-country model, where a democratically-chosen government in each country chooses tax policy. Higher capital mobility changes the politico-economic equilibrium in two ways. On the one hand, it leads to more tax competition between the countries: this “economic effect” tends to lower tax rates in both countries. On the other hand, it alters voters' preferences and makes them elect a different government: this “political effect” offsets the increased tax competition, although not completely.