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Fiscal Competition over Taxes and Public Inputs: Theory and Evidence

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Author Info
Sebastian Hauptmeier ()
Ferdinand Mittermaier ()
Johannes Rincke ()

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Abstract

We set up a model to characterize the reaction functions of governments competing for mobile capital by simultaneously setting both the business tax rate as well as the level of provision of a productive public input. Using a rich data set of local jurisdictions, we then test the predictions of the model with respect to the nature of strategic interaction among governments. Our findings from efficient estimation of a system of spatially interrelated equations for both policy instruments support the notion that local governments use both the business tax rate and public inputs to compete for capital. In particular, we find that if neighbors cut their tax rates, governments try to restore competitiveness by lowering their own tax and increasing spending on public inputs. If neighbors provide more infrastructure, governments react by increasing their own spending on public inputs.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2499.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2499

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Related research
Keywords: tax competition; public input; competition; system estimation;

Other versions of this item:

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Kelejian, Harry H & Prucha, Ingmar R, 1999. "A Generalized Moments Estimator for the Autoregressive Parameter in a Spatial Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 509-33, May.
  2. Buettner, Thiess, 2001. "Local business taxation and competition for capital: the choice of the tax rate," Regional Science and Urban Economics, Elsevier, vol. 31(2-3), pages 215-245, April. [Downloadable!] (restricted)
    Other versions:
  3. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November. [Downloadable!] (restricted)
  4. Craig, Steven G., 1987. "The impact of congestion on local public good production," Journal of Public Economics, Elsevier, vol. 32(3), pages 331-353, April. [Downloadable!] (restricted)
  5. Hindriks, Jean & Peralta, Susana & Weber, Shlomo, 2008. "Competing in taxes and investment under fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2392-2402, December. [Downloadable!] (restricted)
  6. Matsumoto, Mutsumi, 2000. "A Tax Competition Analysis of Congestible Public Inputs," Journal of Urban Economics, Elsevier, vol. 48(2), pages 242-259, September. [Downloadable!] (restricted)
  7. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
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  8. Buettner, Thiess, 2003. "Tax base effects and fiscal externalities of local capital taxation: evidence from a panel of German jurisdictions," Journal of Urban Economics, Elsevier, vol. 54(1), pages 110-128, July. [Downloadable!] (restricted)
  9. Buettner, Thiess, 2006. "The incentive effect of fiscal equalization transfers on tax policy," Journal of Public Economics, Elsevier, vol. 90(3), pages 477-497, February. [Downloadable!] (restricted)
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  10. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March. [Downloadable!] (restricted)
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  11. Hindriks, Jean J.G. & Peralta, Susana & Weber, Shlomo, 2007. "Competing in Taxes and Investment under Fiscal Equalization," CEPR Discussion Papers 6431, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Agnès Bénassy-Quéré & Nicolas Gobalraja & Alain Trannoy, 2007. "Tax and public input competition," Economic Policy, CEPR, CES, MSH, vol. 22, pages 385-430, 04. [Downloadable!] (restricted)
  13. Baicker, Katherine, 2005. "The spillover effects of state spending," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 529-544, February. [Downloadable!] (restricted)
  14. Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, 01. [Downloadable!] (restricted)
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  15. Bucovetsky, S., 2005. "Public input competition," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1763-1787, September. [Downloadable!] (restricted)
  16. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May. [Downloadable!] (restricted)
  17. Keen, Michael & Marchand, Maurice, 1997. "Fiscal competition and the pattern of public spending," Journal of Public Economics, Elsevier, vol. 66(1), pages 33-53, October. [Downloadable!] (restricted)
  18. Wildasin, David E., 1991. "Some rudimetary 'duopolity' theory," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 393-421, November. [Downloadable!] (restricted)
  19. John G. Fernald, 1999. "Roads to Prosperity? Assessing the Link between Public Capital and Productivity," American Economic Review, American Economic Association, vol. 89(3), pages 619-638, June. [Downloadable!] (restricted)
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  20. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May. [Downloadable!] (restricted)
  21. Taylor, Leon, 1992. "Infrastructural competition among jurisdictions," Journal of Public Economics, Elsevier, vol. 49(2), pages 241-259, November. [Downloadable!] (restricted)
  22. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Luca Agnello & Ricardo M. Sousa, 2009. "The determinants of public deficit volatility," Working Paper Series 1042, European Central Bank. [Downloadable!]
    Other versions:
  2. Matthieu Darracq Pariès & Stéphane Moyen, 2009. "Monetary Policy and Inflationary Shocks Under Imperfect Credibility," Working Paper Series 1065, European Central Bank. [Downloadable!]
  3. Thomas Y. Mathä & Olivier Pierrard, 2009. "Search in the Product Market and the Real Business Cycle," Working Paper Series 1036, European Central Bank. [Downloadable!]
    Other versions:
  4. Jens Eisenschmidt & Astrid Hirsch & Tobias Linzert, 2009. "Bidding behaviour in the ECB's main refinancing operations during the financial crisis," Working Paper Series 1052, European Central Bank. [Downloadable!]
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