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Can lower tax rates be bought? Business rent-seeking and tax competition among U.S. states

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  • Robert S. Chirinko
  • Daniel J. Wilson

Abstract

The 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 Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2009-29.

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Date of creation: 2009
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Handle: RePEc:fip:fedfwp:2009-29

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Keywords: Taxation;

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  1. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics.
  2. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. Aggarwal Rajesh K. & Meschke Felix & Wang Tracy Yue, 2012. "Corporate Political Donations: Investment or Agency?," Business and Politics, De Gruyter, vol. 14(1), pages 1-40, April.
  4. 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.
  5. Robert S. Chirinko & Daniel J. Wilson, 2006. "State investment tax incentives: a zero-sum game?," Working Paper Series 2006-47, Federal Reserve Bank of San Francisco.
  6. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  7. 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, vol. 20(4), pages 518-29, October.
  8. Michael J. Cooper & Huseyin Gulen & Alexei V. Ovtchinnikov, 2010. "Corporate Political Contributions and Stock Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 687-724, 04.
  9. Daniel Wilson, 2006. "The mystery of falling state corporate income taxes," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec8.
  10. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  11. 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, vol. 52(3), pages 285-307, October.
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Cited by:
  1. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
  2. Esteller-Moré, Alejandro & Galmarini, Umberto & Rizzo, Leonzio, 2012. "Vertical tax competition and consumption externalities in a federation with lobbying," Journal of Public Economics, Elsevier, vol. 96(3), pages 295-305.
  3. 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 21105, Hamburg University, Department of Economics.
  4. Michael Devereux & Simon Loretz, 2012. "What do we know about corporate tax competition?," Working Papers 1229, Oxford University Centre for Business Taxation.

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