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Can Lower Tax Rates Be Bought? Business Rent-Seeking And Tax Competition Among U.S. States

  • Chirinko, Robert S.
  • Wilsom, Daniel J.

The standard model of strategic tax competition assumes that government policymakers are perfectly benevolent. We depart from this assumption by allowing for the possibility that policymakers are influenced by the rent-seeking (lobbying) behavior of businesses. This extension implies that business campaign contributions may affect not only the levels of equilibrium tax rates, but also the slope of the tax reaction function between jurisdictions, thus enhancing or retarding capital mobility. With panel data for 48 U.S. states and unique data on business campaign contributions, we document, among other results, a significant direct effect of contributions on tax policy; the economic value of a $1 contribution in terms of lower state corporate taxes is approximately $6.65.

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Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 63 (2010)
Issue (Month): 4 (December)
Pages: 967-93

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Handle: RePEc:ntj:journl:v:63:y:2010:i:4:p:967-93
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  1. Daniel Wilson, 2006. "The mystery of falling state corporate income taxes," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec8.
  2. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-29, October.
  3. Michael J. Cooper & Huseyin Gulen & Alexei V. Ovtchinnikov, 2010. "Corporate Political Contributions and Stock Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 687-724, 04.
  4. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  5. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
  6. Aggarwal Rajesh K. & Meschke Felix & Wang Tracy Yue, 2012. "Corporate Political Donations: Investment or Agency?," Business and Politics, De Gruyter, vol. 14(1), pages 1-40, April.
  7. Robert S. Chirinko & Daniel J. Wilson, 2007. "State Investment Tax Incentives: A Zero-Sum Game?," CESifo Working Paper Series 1895, CESifo Group Munich.
  8. Case, Anne C. & Rosen, Harvey S. & Hines, James Jr., 1993. "Budget spillovers and fiscal policy interdependence : Evidence from the states," Journal of Public Economics, Elsevier, vol. 52(3), pages 285-307, October.
  9. Gene M. Grossman & Elhanan Helpman, 1992. "Protection For Sale," NBER Working Papers 4149, National Bureau of Economic Research, Inc.
  10. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete over Corporate Tax Rates?," CEPR Discussion Papers 3400, C.E.P.R. Discussion Papers.
  11. Robert S. Chirinko & Daniel J. Wilson, 2011. "Tax Competition Among U.S. States: Racing to the Bottom or Riding on a Seesaw?," CESifo Working Paper Series 3535, CESifo Group Munich.
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