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Can Lower Tax Rates Be Bought? Business Rent-Seeking And Tax Competition Among U.S. States

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  • Chirinko, Robert S.
  • Wilsom, Daniel J.

Abstract

The standard model of strategic tax competition assumes that government policymakers are perfectly benevolent. We depart from this assumption by allowing for the possibility that policymakers are influenced by the rent-seeking (lobbying) behavior of businesses. This extension implies that business campaign contributions may affect not only the levels of equilibrium tax rates, but also the slope of the tax reaction function between jurisdictions, thus enhancing or retarding capital mobility. With panel data for 48 U.S. states and unique data on business campaign contributions, we document, among other results, a significant direct effect of contributions on tax policy; the economic value of a $1 contribution in terms of lower state corporate taxes is approximately $6.65.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 63 (2010)
Issue (Month): 4 (December)
Pages: 967-93

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Handle: RePEc:ntj:journl:v:63:y:2010:i:4:p:967-93

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References

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  1. Gene M. Grossman & Elhanan Helpman, 1992. "Protection For Sale," NBER Working Papers 4149, National Bureau of Economic Research, Inc.
  2. Aggarwal Rajesh K. & Meschke Felix & Wang Tracy Yue, 2012. "Corporate Political Donations: Investment or Agency?," Business and Politics, De Gruyter, De Gruyter, vol. 14(1), pages 1-40, April.
  3. Bob Chirinko & Daniel J. Wilson, 2007. "Tax competition among U.S. states: racing to the bottom or riding on a seesaw?," Working Paper Series, Federal Reserve Bank of San Francisco 2008-03, Federal Reserve Bank of San Francisco.
  4. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 642, University of Warwick, Department of Economics.
  5. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers, Institute for Fiscal Studies W94/07, Institute for Fiscal Studies.
  6. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0284, National Bureau of Economic Research, Inc.
  7. Robert S. Chirinko & Daniel J. Wilson, 2007. "State Investment Tax Incentives: A Zero-Sum Game?," CESifo Working Paper Series, CESifo Group Munich 1895, CESifo Group Munich.
  8. Daniel Wilson, 2006. "The mystery of falling state corporate income taxes," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue dec8.
  9. Case, Anne C. & Rosen, Harvey S. & Hines, James Jr., 1993. "Budget spillovers and fiscal policy interdependence : Evidence from the states," Journal of Public Economics, Elsevier, Elsevier, vol. 52(3), pages 285-307, October.
  10. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(4), pages 518-29, October.
  11. Michael J. Cooper & Huseyin Gulen & Alexei V. Ovtchinnikov, 2010. "Corporate Political Contributions and Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 65(2), pages 687-724, 04.
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Cited by:
  1. Michael Funke & Yu-Fu Chen & Aaron Mehrota, 2011. "Global warming and extreme events: Rethinking the timing and intensity of environment policy," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21105, Hamburg University, Department of Economics.
  2. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers, Max Planck Institute for Tax Law and Public Finance international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
  3. Esteller-Moré, Alejandro & Galmarini, Umberto & Rizzo, Leonzio, 2012. "Vertical tax competition and consumption externalities in a federation with lobbying," Journal of Public Economics, Elsevier, Elsevier, vol. 96(3), pages 295-305.
  4. Michael Devereux & Simon Loretz, 2012. "What do we know about corporate tax competition?," Working Papers, Oxford University Centre for Business Taxation 1229, Oxford University Centre for Business Taxation.
  5. Chen, Yu-Fu & Funke, Michael, 2010. "Global Warming And Extreme Events: Rethinking The Timing And Intensity Of Environmental Policy," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-48, Scottish Institute for Research in Economics (SIRE).

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