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Crossing Mountains: The Effect of Competition on the Laffer Curve

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  • Hugo Miguel de Oliveira Cruz Pinto de Abreu

    ()
    (University of Porto - Faculty of Economics)

  • Elísio Fernando Moreira Brandão

    ()
    (University of Porto - Faculty of Economics)

  • Samuel Cruz Alves Pereira

    ()
    (University of Porto - Faculty of Economics)

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    Abstract

    Regarding states and state-like entities as producers and taxation as a price, this paper connects the thoroughly studied impacts of the market structures in microeconomics to the controversial Laffer curve, suggesting that the outcome of the “taxation market” depends also on competition. By studying the determinants for Property Tax revenue for the 308 Portuguese municipalities, a general model that successfully explains tax revenue is developed. Evidence is found for the existence of a two-peaked Laffer curve in the sample, and various tests indicate that competition impacts – shifting but also changing – the Laffer curve, causing more competitive municipalities to maximize revenue at lower tax rates – i.e. lower prices - than those in a more monopolistic setting.

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    File URL: http://www.fep.up.pt/investigacao/workingpapers/wp523.pdf
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    Bibliographic Info

    Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 523.

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    Length: 34 pages
    Date of creation: Jan 2014
    Date of revision:
    Handle: RePEc:por:fepwps:523

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    Related research

    Keywords: Laffer curve; Taxation; Market Structure; Competition; Municipalities; Portugal;

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    1. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    2. Henrik Hammar & Sverker C. Jagers & Katarina Nordblom, 2008. "Attitudes towards Tax Levels: A Multi-Tax Comparison," Fiscal Studies, Institute for Fiscal Studies, vol. 29(4), pages 523-543, December.
    3. Trabandt, Mathias & Uhlig, Harald, 2006. "How Far Are We From the Slippery Slope? The Laffer Curve Revisited," CEPR Discussion Papers 5657, C.E.P.R. Discussion Papers.
    4. Feige, Edgar L & McGee, Robert T, 1983. " Sweden's Laffer Curve: Taxation and the Unobserved Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(4), pages 499-519.
    5. José da Silva Costa & Armindo Cravalho, 2013. "Yardstick Competition among Portuguese Municipalities: The Case of Urban Property Tax (IMI)," FEP Working Papers 495, Universidade do Porto, Faculdade de Economia do Porto.
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