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The Brazilian 'Tax War': The Case of Value-Added Tax Competition among the States

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  • Luiz de Mello

Abstract

This paper tests for horizontal tax competition in the VAT for a sample of Brazilian states in the period 1985-2001. The states have considerable autonomy to set their VAT rates and bases, often using this tax as an industrial policy tool. The empirical findings, based on the estimation of a tax reaction function in an error-correction set-up, confirm the hypothesis of horizontal tax competition: the states react strongly to changes in their neighbours? VAT code, especially those that belong to the same geo-economic region. Also, there appears to be a Stackelberg leader among the states, with the remaining jurisdictions responding strongly to its policy moves. There is no co-occupancy of tax bases between different levels of government and hence limited scope for vertical externalities in tax setting. But the fact that the federal government shares with the states part of the revenue of its more elastic taxes, such as the income tax, appears to affect the opportunity cost of horizontal tax competition. La "guerre fiscale" au Brésil : La concurrence des états sur la taxe sur la valeur ajoutée Ce document présente une analyse empirique de la concurrence horizontale sur la taxe sur la valeur ajoutée (TVA) parmi les états du Brésil durant la période 1985-2001. Les états brésiliens ont une autonomie considérable en matière de politique fiscale pour établir le taux d’imposition et l’assiette de leur TVA. Ils se servent souvent de cet impôt comme instrument de politique industrielle. Les résultats de l’analyse empirique basée sur l’estimation d’une fonction de réaction fiscale avec un mécanisme de correction d’erreur confirme l’hypothèse de concurrence horizontale parmi les états: ils réagissent fortement aux changements des taux d’imposition de la TVA de leurs voisins, surtout ceux qui appartiennent à la même région géo-économique. Par ailleurs, il y a un leader Stackelberg parmi les états, puisque les autres administrations réagissent fortement à sa politique fiscale. Les différents niveaux d’administration ne partagent pas les mêmes assiettes de sorte que les externalités verticales associées à la politique fiscale sont assez limitée au Brésil. Néanmoins, le fait que l’administration fédérale partage avec les états une part importante des recettes de ses impôts plus élastiques, tel que l’impôt sur le revenu, affecte le coût d’opportunité de la concurrence horizontale parmi les états en terme de politique fiscale.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 544.

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Date of creation: 14 Feb 2007
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Handle: RePEc:oec:ecoaaa:544-en

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Keywords: Brazil; ICMS; Nash; Stackelberg; fiscal federalism; tax reaction function; Brésil; Stackelberg; Nash; ICMS; fédéralisme budgétaire; fonction de réaction fiscale;

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  1. Thiess Buettner, 2001. "Local Business Taxation and Competition for Capital: The Choice of the Tax Rate," CESifo Working Paper Series 440, CESifo Group Munich.
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  14. Michael Keen, 1997. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Working Papers 97/173, International Monetary Fund.
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