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Consumption tax competition among governments: Evidence from the United States

  • Jan Jacobs
  • Jenny Ligthart

    ()

  • Hendrik Vrijburg

The paper contributes to a small but growing literature that estimates tax re- action functions of governments competing with other governments. We analyze consumption tax competition between US states, employing a panel of state-level data for 1977-2003. More specifically, we study the impact of a state's spatial characteristics|that is, its size, geographic position, and border length on the strategic interaction with its neighbors. For this purpose, we calculate for each state an average effective consumption tax rate, which covers both sales and excise taxes. In addition, we pay attention to dynamics by including lagged dependent variables in the tax reaction function. We find overwhelming evidence for strategic interaction among state governments, but only partial support for the effect of spatial character- istics on tax setting. Tax competition seems to have lessened in the 1990s compared to the early 1980s.

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File URL: http://hdl.handle.net/10.1007/s10797-009-9118-z
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 17 (2010)
Issue (Month): 3 (June)
Pages: 271-294

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Handle: RePEc:kap:itaxpf:v:17:y:2010:i:3:p:271-294
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  1. Egger, Peter & Pfaffermayr, Michael & Winner, Hannes, 2005. "An unbalanced spatial panel data approach to US state tax competition," Economics Letters, Elsevier, vol. 88(3), pages 329-335, September.
  2. Nielsen, Soren Bo, 2001. " A Simple Model of Commodity Taxation and Cross-Border Shopping," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 599-623, December.
  3. Ohsawa, Yoshiaki, 1999. "Cross-border shopping and commodity tax competition among governments," Regional Science and Urban Economics, Elsevier, vol. 29(1), pages 33-51, January.
  4. Andreas Haufler, 1996. "Tax coordination with different preferences for public goods: Conflict or harmony of interest?," International Tax and Public Finance, Springer, vol. 3(1), pages 5-28, January.
  5. Tim Besley & Harvey S. Rosen, 1997. "Vertical externalities in tax settings: evidence from gasoline and cigarettes," IFS Working Papers W97/23, Institute for Fiscal Studies.
  6. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 531-42, July.
  7. MINTZ, Jack & TULKENS, Henry, . "Commodity tax competition between member states of a federation: equilibrium and efficiency," CORE Discussion Papers RP -693, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Federico Revelli, 2005. "On Spatial Public Finance Empirics," International Tax and Public Finance, Springer, vol. 12(4), pages 475-492, August.
  9. Kapoor, Mudit & Kelejian, Harry H. & Prucha, Ingmar R., 2007. "Panel data models with spatially correlated error components," Journal of Econometrics, Elsevier, vol. 140(1), pages 97-130, September.
  10. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2004. "Horizontal and Vertical Indirect Tax Competition: Theory and Some Evidence From the USA," CEPR Discussion Papers 4470, C.E.P.R. Discussion Papers.
  11. You-Qiang Wang, 1999. "Commodity Taxes under Fiscal Competition: Stackelberg Equilibrium and Optimality," American Economic Review, American Economic Association, vol. 89(4), pages 974-981, September.
  12. Charlotte Ostergaard & Bent E. Sorensen & Oved Yosha, 2000. "Consumption and aggregate constraints : evidence from U.S. states and Canadian provinces," Research Working Paper RWP 00-04, Federal Reserve Bank of Kansas City.
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