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Culture and Taxes: Towards Identifying Tax Competition

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  • Beatrix Eugster
  • Raphaël Parchet

Abstract

We propose a new strategy to identify the existence of interjurisdictional tax competition and to estimate its spatial reach. Our strategy rests on differences between desired tax levels, determined by culture-specific preferences, and equilibrium tax levels, determined by interjurisdictional fiscal externalities as well as by preferences. While fiscal preferences differ systematically and demonstrably between French-speaking and German-speaking Swiss regions, we find that local income tax burdens do not change discretely at the language border but exhibit smooth spatial gradients. The slope of these gradients implies that tax competition constrains tax choices of jurisdictions with a preference for higher taxes at a distance of up to 20 kilometres. Hence, tax competition does constrain income taxation by local governments. When, as in the Swiss system, local jurisdictions are constrained to decide on a single shifter of an exogenously given tax schedule, the effect of tax competition are confined to a small spatial scale.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 11.05.

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Length: 28 pp. + appendix
Date of creation: Aug 2011
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Handle: RePEc:lau:crdeep:11.05

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Keywords: tax competition; fiscal federalism; culture;

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Citations

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Cited by:
  1. Giuseppe Bertola & John Driffill & Harold James & Hans-Werner Sinn & Jan-Egbert Sturm & Ákos Valentinyi, 2014. "Chapter 2: Switzerland: Relic of the Past, Model for the Future?," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 55-73, 02.
  2. Geys, Benny & Osterloh, Steffen, 2012. "Borders as boundaries to fiscal policy interactions? An empirical analysis of politicians' opinions on rivals in the competition for firms," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2012-113, Social Science Research Center Berlin (WZB).
  3. Teemu Lyytikäinen, 2011. "Tax competition among local governments: evidence from a property tax reform in Finland," Working Papers 2011/35, Institut d'Economia de Barcelona (IEB).
  4. Mario Morger, 2013. "What Do Immigrants Value Most About Switzerland? Evidence of the Relative Importance of Income Taxes," CESifo Working Paper Series 4134, CESifo Group Munich.
  5. Baskaran, Thushyanthan, 2013. "Identifying local tax mimicking: Administrative borders and a policy reform," Center for European, Governance and Economic Development Research Discussion Papers 157, University of Goettingen, Department of Economics.
  6. Luthi, Eva & Schmidheiny, Kurt, 2011. "The Effect of Agglomeration Size on Local Taxes," CEPR Discussion Papers 8344, C.E.P.R. Discussion Papers.
  7. Raphael Parchet, 2012. "Are Local Tax Rates Strategic Complements or Substitutes?," ERSA conference papers ersa12p313, European Regional Science Association.
  8. Geys, Benny & Osterloh, Steffen, 2011. "Politicians' opinions on rivals in the competition for firms: An empirical analysis of reference points near a border," ZEW Discussion Papers 11-020, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Eugster, Beatrix, 2013. "Effects of a higher replacement rate on unemployment durations, employment, and earnings," Economics Working Paper Series 1320, University of St. Gallen, School of Economics and Political Science.

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