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

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Author Info
Rosanne Altshuler () (Rutgers University, Department of Economics)
Timothy J. Goodspeed () (Hunter College and CUNY Graduate Center)

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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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Publisher 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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Find related papers by JEL classification:
H0 - Public Economics - - General
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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  1. Ronald B. Davies & Johannes Voget, 2008. "Tax Competition in an Expanding European Union," Working Papers 0830, Oxford University Centre for Business Taxation. [Downloadable!]
    Other versions:
  2. Eva de Francisco, 2005. "Limited Participation, Income Distribution and Capital Account Liberalization," Computing in Economics and Finance 2005 454, Society for Computational Economics. [Downloadable!]
  3. Arik Levinson, . "Environmental Regulatory Competition: A Status Report and Some New Evident," Working Papers gueconwpa~02-02-07, Georgetown University, Department of Economics. [Downloadable!]
  4. Jukka Pirttilä, 2004. "Is International Labour Mobility a Threat to the Welfare State? Evidence from Finland in the 1990s," Finnish Economic Papers, Finnish Economic Association, vol. 17(1), pages 18-34, Spring. [Downloadable!]
  5. Alan Auerbach & Michael P. Devereux & Helen Simpson, 2007. "Taxing Corporate Income," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  6. Marcin Piatkowski & Mariusz Jarmuzek, 2008. "Zero Corporate Income Tax in Moldova: Tax Competition and Its Implications for Eastern Europe," IMF Working Papers 08/203, International Monetary Fund. [Downloadable!]
  7. Joanna Piotrowska & Werner Vanborren, 2008. "The corporate income tax rate-revenue paradox: Evidence in the EU," Taxation Papers 12, Directorate General Taxation and Customs Union, European Commission, revised Oct 2008. [Downloadable!]
  8. Michela Redoano, 2007. "Fiscal Interactions Among European Countries. Does the EU Matter?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  9. Ruiz, Fernando & Gerard, Marcel, 2008. "Is there evidence of strategic corporate tax interaction among EU countries?," MPRA Paper 10094, University Library of Munich, Germany. [Downloadable!]
  10. Rosanne Altshuler & Harry Grubert, 2004. "Taxpayer Responses to Competitive Tax Policies and Tax Policy Responses to Competitive Taxpayers: Recent Evidence," Departmental Working Papers 200406, Rutgers University, Department of Economics. [Downloadable!]
  11. Karen Crabb? & Hylke Vandenbussche, 2008. "Are your firm’s taxes set in Warsaw? Spatial tax competition in Europe," LICOS Discussion Papers 21608, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
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  12. Bob Chirinko & Daniel J. Wilson, 2007. "Tax competition among U.S. states: racing to the bottom or riding on a seesaw?," Working Paper Series 2008-03, Federal Reserve Bank of San Francisco. [Downloadable!]
  13. Signe Krogstrup, 2004. "Are Corporate Tax Burdens Racing to the Bottom in the European Union?," EPRU Working Paper Series 04-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  14. Hans Pitlik, 2005. "Folgt die Steuerpolitik in der EU der Logik des Steuerwettbewerbs," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 256/2005, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  15. Peter Mullins, 2006. "Moving to Territoriality? Implications for the United States and the Rest of the World," IMF Working Papers 06/161, International Monetary Fund. [Downloadable!]
  16. Lars P Feld, 2004. "On Tax Competition: The (Un-)Expected Advantages of Decentralized Fiscal Autonomy," Marburg Working Papers on Economics 200425, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung). [Downloadable!]
  17. Martial Foucault & Thierry Madies & Sonia Paty, 2008. "Public spending interactions and local politics. Empirical evidence from French municipalities," Public Choice, Springer, vol. 137(1), pages 57-80, October. [Downloadable!] (restricted)
  18. Alexander Klemm & Stefan van Parys, 2009. "Empirical Evidence on the Effects of Tax Incentives," IMF Working Papers 09/136, International Monetary Fund. [Downloadable!]
  19. Aleksandra Riedl & Silvia Rocha-Akis, 2008. "Testing the tax competition theory: How elastic are national tax bases in Western Europe?," Working Papers 142, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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