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Consumption tax competition among governments: Evidence from the United States

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  • Vrijburg, H.
  • Jacobs, J.P.A.M.
  • Ligthart, J.E.

    (Groningen University)

Abstract

The paper contributes to a small but growing literature that estimates tax re- action functions of governments competing with other governments. We analyze consumption tax competition between US states, employing a panel of state-level data for 1977-2003. More specifically, we study the impact of a state's spatial characteristics|that is, its size, geographic position, and border length on the strategic interaction with its neighbors. For this purpose, we calculate for each state an average effective consumption tax rate, which covers both sales and excise taxes. In addition, we pay attention to dynamics by including lagged dependent variables in the tax reaction function. We find overwhelming evidence for strategic interaction among state governments, but only partial support for the effect of spatial character- istics on tax setting. Tax competition seems to have lessened in the 1990s compared to the early 1980s.

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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 07008.

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Date of creation: 2007
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Handle: RePEc:dgr:rugsom:07008

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References

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  1. MINTZ, Jack & TULKENS, Henry, . "Commodity tax competition between member states of a federation: equilibrium and efficiency," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -693, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Haufler, Andreas, 1996. "Tax Coordination with Different Preferences for Public Goods: Conflict or Harmony of Interest?," Munich Reprints in Economics, University of Munich, Department of Economics 20392, University of Munich, Department of Economics.
  3. Søren Bo Nielsen, . "A Simple Model of Commodity Taxation and Cross-Border Shopping," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 98-18, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  4. Timothy J. Besley & Harvey S. Rosen, 1999. "Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes," NBER Working Papers 6517, National Bureau of Economic Research, Inc.
  5. Egger, Peter & Pfaffermayr, Michael & Winner, Hannes, 2005. "An unbalanced spatial panel data approach to US state tax competition," Economics Letters, Elsevier, Elsevier, vol. 88(3), pages 329-335, September.
  6. Michiel Evers & Herman R. J. Vollebergh & Ruud A. de Mooij, 2004. "Tax Competition under Minimum Rates: The Case of European Diesel Excises," CESifo Working Paper Series 1221, CESifo Group Munich.
  7. Devereux, Michael & Lockwood, Ben & Redoano, Michela, 2004. "Horizontal And Vertical Indirect Tax Competition : Theory And Some Evidence From The Usa," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 704, University of Warwick, Department of Economics.
  8. Federico Revelli, 2005. "On Spatial Public Finance Empirics," International Tax and Public Finance, Springer, Springer, vol. 12(4), pages 475-492, August.
  9. Ostergaard, Charlotte & Sorensen, Bent E & Yosha, Oved, 2001. "Consumption and Aggregate Constraints: Evidence from US States and Canadian Provinces," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2947, C.E.P.R. Discussion Papers.
  10. Ohsawa, Yoshiaki, 1999. "Cross-border shopping and commodity tax competition among governments," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 29(1), pages 33-51, January.
  11. Egger, Peter & Pfaffermayr, Michael & Winner, Hannes, 2005. "Commodity taxation in a 'linear' world: a spatial panel data approach," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 35(5), pages 527-541, September.
  12. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(3), pages 531-42, July.
  13. You-Qiang Wang, 1999. "Commodity Taxes under Fiscal Competition: Stackelberg Equilibrium and Optimality," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 974-981, September.
  14. Kapoor, Mudit & Kelejian, Harry H. & Prucha, Ingmar R., 2007. "Panel data models with spatially correlated error components," Journal of Econometrics, Elsevier, Elsevier, vol. 140(1), pages 97-130, September.
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Cited by:
  1. Yongzheng Liu & Jorge Martinez-Vazquez, 2014. "Inter-Jurisdictional Tax Competition In China," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1403, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. David Bartolini & Raffaella Santolini, 2012. "Political yardstick competition among Italian municipalities on spending decisions," The Annals of Regional Science, Springer, Springer, vol. 49(1), pages 213-235, August.
  3. Yongzheng Liu, 2014. "Does Competition for Capital Discipline Governments? The Role of Fiscal Equalization," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1404, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Alejandro Esteller-Moré & Leonzio Rizzo, 2014. "US excise tax horizontal interdependence: yardstick versus tax competition," The Annals of Regional Science, Springer, Springer, vol. 52(3), pages 711-737, May.
  5. Sebastian G. Kessing & Bernhard Koldert, 2012. "Cross-Border Shopping and the Atkinson-Stiglitz Theorem," Volkswirtschaftliche Diskussionsbeiträge, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht 158-12, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  6. Robert S. Chirinko & Daniel J. Wilson, 2011. "Tax Competition Among U.S. States: Racing to the Bottom or Riding on a Seesaw?," CESifo Working Paper Series 3535, CESifo Group Munich.
  7. 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.
  8. David Agrawal, 2014. "Lost in America: Evidence on Local Sales Taxes from National Panel Data," CESifo Working Paper Series 4943, CESifo Group Munich.
  9. Paizs, László, 2009. "Gázolaj-jövedékiadó verseny az Európai Unióban
    [Fiscal competition on the market for diesel fuel in the European Union]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 216-238.
  10. Alejandro Esteller-Moré & Leonzio Rizzo, 2010. "Politics or mobility? Evidence from us excise taxation," Working Papers 2010/3, Institut d'Economia de Barcelona (IEB).
  11. Leonzio Rizzo & Alejandro Esteller - Moré, 2011. "US Excise Tax Horizontal Interdependence: Yardstick vs. Tax Competition," Working Papers 201116, University of Ferrara, Department of Economics.
  12. Enlinson Mattos & Ricardo Politi, 2014. "Pro-poor tax policy and yardstick competition: a spatial investigation for VAT relief on food in Brazil," The Annals of Regional Science, Springer, Springer, vol. 52(1), pages 279-307, January.

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