Can lower tax rates be bought? Business rent-seeking and tax competition among U.S. states
AbstractThe standard model of strategic tax competition – the non-cooperative tax-setting behavior of jurisdictions competing for a mobile capital tax base – assumes that government policymakers are perfectly benevolent, acting solely to maximize the utility of the representative resident in their jurisdiction. We depart from this assumption by allowing for the possibility that policymakers, given the political and electoral environments in which they operate, also may be influenced by the rent-seeking (lobbying) behavior of businesses. Firms recognize the factors affecting policymakers’ welfare and may make campaign contributions to influence tax policy. These changes to the standard strategic tax competition model imply that business contributions affect not only the levels of equilibrium tax rates but also the slope of the tax reaction function between jurisdictions. Thus, business campaign contributions may affect tax competition and enhance or retard the mobility of capital across jurisdictions. ; Based on a panel of 48 U.S. states and unique data on business campaign contributions, our empirical work uncovers four key results. First, we document a significant direct effect of business contributions on tax policy. Second, the economic value of a $1 business campaign contribution in terms of lower state corporate taxes is nearly $4. Third, the slope of the reaction function between tax policy in a given state and the tax policies of its competitive states is negative. Fourth, we highlight the sensitivity of the empirical results to state effects.
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Bibliographic InfoPaper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2009-29.
Date of creation: 2009
Date of revision:
Other versions of this item:
- Robert S. Chirinko & Daniel J. Wilson, 2010. "Can Lower Tax Rates be Bought? Business Rent-Seeking and Tax Competition among U.S. States," CESifo Working Paper Series 3121, CESifo Group Munich.
- Robert S. Chirinko & Daniel J. Wilson, 2010. "Can lower tax rates be bought? Business rent-seeking and tax competition among U.S.States," Working Papers 2010/2, Institut d'Economia de Barcelona (IEB).
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-01-16 (Accounting & Auditing)
- NEP-ALL-2010-01-16 (All new papers)
- NEP-CDM-2010-01-16 (Collective Decision-Making)
- NEP-PBE-2010-01-16 (Public Economics)
- NEP-PUB-2010-01-16 (Public Finance)
- NEP-URE-2010-01-16 (Urban & Real Estate Economics)
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