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Culture and Taxes: Towards Identifying Tax Competition

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  • Eugster, Beatrix

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  • Parchet, Raphaël

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Abstract

We propose a difference-in-differences 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 up to a distance of around 20 kilometers. Hence, tax competition does constrain income taxation by local governments but its effect is confined to a small spatial scale.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1339.pdf
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Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1339.

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Length: 44 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:usg:econwp:2013:39

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Keywords: Tax competition; fiscal federalism; culture;

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References

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Citations

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Cited by:
  1. Raphael Parchet, 2012. "Are Local Tax Rates Strategic Complements or Substitutes?," ERSA conference papers ersa12p313, European Regional Science Association.
  2. 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.
  3. Eva Luthi & Kurt Schmidheiny, 2011. "The Effect of Agglomeration Size on Local Taxes," CESifo Working Paper Series 3426, CESifo Group Munich.
  4. Teemu Lyytikäinen, 2011. "Tax competition among local governments: evidence from a property tax reform in Finland," Working Papers 26, Government Institute for Economic Research Finland (VATT).
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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).

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