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Tax competition among local governments: Evidence from a property tax reform in Finland

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  • Lyytikäinen, Teemu

Abstract

This paper uses a Finnish policy intervention to study tax competition among local governments. Changes in the statutory lower limits to the property tax rates are used as a source of exogenous variation to estimate the responses of municipalities to tax rates in their neighboring municipalities. I do not find evidence of interdependence in property tax rates among Finnish municipalities. The results are in contrast to the earlier empirical literature, using data from other countries, that has mainly found positive interdependence in tax rates. I compare the causal estimates based on the policy change to the commonly used Spatial Lag estimates and Spatial Instrumental Variables estimates, which are based on highly restrictive assumptions. The comparisons suggest that the standard spatial econometrics methods may have a tendency to overestimate the degree of interdependence in tax rates.

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  • Lyytikäinen, Teemu, 2012. "Tax competition among local governments: Evidence from a property tax reform in Finland," Journal of Public Economics, Elsevier, vol. 96(7-8), pages 584-595.
  • Handle: RePEc:eee:pubeco:v:96:y:2012:i:7:p:584-595
    DOI: 10.1016/j.jpubeco.2012.03.002
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    Cited by:

    1. Stephen Gibbons & Henry G. Overman, 2012. "Mostly Pointless Spatial Econometrics?," Journal of Regional Science, Wiley Blackwell, vol. 52(2), pages 172-191, May.
    2. Chirinko, Robert S. & Wilson, Daniel J., 2017. "Tax competition among U.S. states: Racing to the bottom or riding on a seesaw?," Journal of Public Economics, Elsevier, vol. 155(C), pages 147-163.
    3. repec:kap:itaxpf:v:24:y:2017:i:6:d:10.1007_s10797-016-9429-9 is not listed on IDEAS
    4. Galletta, Sergio, 2017. "Law enforcement, municipal budgets and spillover effects: Evidence from a quasi-experiment in Italy," Journal of Urban Economics, Elsevier, vol. 101(C), pages 90-105.
    5. repec:kap:pubcho:v:172:y:2017:i:3:d:10.1007_s11127-017-0460-x is not listed on IDEAS
    6. Agrawal, David R., 2014. "LOST in America: Evidence on local sales taxes from national panel data," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 147-163.
    7. Zareh Asatryan & Annika Havlik & Frank Streif, 2017. "Vetoing and inaugurating policy like others do: evidence on spatial interactions in voter initiatives," Public Choice, Springer, vol. 172(3), pages 525-544, September.
    8. Mariana Lopes da Fonseca, 2017. "Tax Mimicking in Local Business Taxation: Quasi-experimental Evidence from Portugal," CESifo Working Paper Series 6647, CESifo Group Munich.
    9. Reingewertz, Yaniv, 2014. "Fiscal Decentralization - a Survey of the Empirical Literature," MPRA Paper 59889, University Library of Munich, Germany.
    10. Holzmann, Carolin & von Schwerin, Axel, 2015. "Economic integration and interdependence of tax policy," FAU Discussion Papers in Economics 14/2015, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    11. Danielewicz Justyna & Turała Maciej, 2012. "Inter-Communal Associations – the Future of Metropolitan Area Management?," Folia Oeconomica Stetinensia, De Gruyter Open, vol. 11(1), pages 118-131, January.
    12. Thomas K. Bauer & Tanja Kasten & Lars-H. R. Siemers, 2017. "Business Taxation and Wages: Redistribution and Asymmetric Effects," Volkswirtschaftliche Diskussionsbeiträge 182-17, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    13. Ida, Tomoya & Wilhelmsson, Mats, 2014. "An Empirical Test Of The Dominant Tax Externality In Sweden," Working Paper Series 14/5, Royal Institute of Technology, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin).
    14. Edoardo Di Porto & Angela Parenti & Sonia Paty & Zineb Abidi, 2017. "Local government cooperation at work: a control function approach," Journal of Economic Geography, Oxford University Press, vol. 17(2), pages 435-463.
    15. Blesse, Sebastian & Martin, Thorsten, 2015. "Let's stay in touch - evidence on the role of social learning in local tax interactions," ZEW Discussion Papers 15-081, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    16. repec:eee:jjieco:v:44:y:2017:i:c:p:26-38 is not listed on IDEAS
    17. Baskaran, Thushyanthan, 2014. "Identifying local tax mimicking with administrative borders and a policy reform," Journal of Public Economics, Elsevier, vol. 118(C), pages 41-51.
    18. repec:kap:itaxpf:v:25:y:2018:i:1:d:10.1007_s10797-017-9449-0 is not listed on IDEAS
    19. Baskaran, Thushyanthan & Lopes da Fonseca, Mariana, 2013. "The economics and empirics of tax competition: A survey," Center for European, Governance and Economic Development Research Discussion Papers 163, University of Goettingen, Department of Economics.
    20. repec:kap:itaxpf:v:24:y:2017:i:4:d:10.1007_s10797-017-9461-4 is not listed on IDEAS
    21. Holzmann, Carolin & von Schwerin, Axel, 2015. "Economic Integration and Local Tax Mimicking," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112893, Verein für Socialpolitik / German Economic Association.
    22. 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.

    More about this item

    Keywords

    Property tax; Tax competition; Fiscal interaction; Instrumental variables; Spatial econometrics;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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