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Follow the Leader? Evidence on European and U.S. Tax Competition

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  • Rosanne Altshuler

    ()
    (Rutgers University, Department of Economics)

  • Timothy J. Goodspeed

    ()
    (Hunter College and CUNY Graduate Center)

Abstract

This paper contributes to the small empirical literature that attempts to estimate tax reaction functions of national governments competing with other national governments. Our focus is on European countries. After presenting a simple theoretical model, we estimate reaction functions both for a pure Nash model and for a model in which the U.S. can act as a Stackelberg leader while the European countries compete with each other in a Nash way. Our empirical tests provide evidence that European countries set tax rates strategically interacting with their neighbors and following the lead of the United States. In fact, our results suggest that the tax rates of non-tax haven European countries are more responsive to changes in U.S. rates than to their own neighbor’s rates. However, we find no evidence that either the haven or non-haven countries reacted to the tax changes of the United States before 1986, the year of a major U.S. tax reform. We also reject the hypothesis that the countries in our sample have become more competitive in recent years. This is interesting given that our data span the time period during which tax competition is alleged to have become more intense.

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Bibliographic Info

Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200226.

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Date of creation: 23 Oct 2002
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Handle: RePEc:rut:rutres:200226

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Keywords: tax competition;

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References

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  1. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
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  14. Grubert, Harry & Randolph, William C. & Rousslang, Donald J., 1996. "Country and Multinational Company Responses to the Tax Reform Act of 1986," National Tax Journal, National Tax Association, vol. 49(3), pages 341-58, September.
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  17. Fredriksson, Per G. & Millimet, Daniel L., 2002. "Is there a 'California effect' in US environmental policymaking?," Regional Science and Urban Economics, Elsevier, vol. 32(6), pages 737-764, November.
  18. Rosanne Altshuler & Harry Grubert, 2005. "The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies," CESifo Working Paper Series 1613, CESifo Group Munich.
  19. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-92, September.
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