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Fiscal Interactions Among European Countries. Does the EU Matter?

  • Michela Redoano

We use a panel of European countries to investigate whether or not governments interact with their neighbors when they decide their fiscal policy; we consider both taxes and expenditures, at aggregate and at separate aspects of policy. We analyse possible different competitive behaviours and find evidence of fiscal interdependencies consistently with the literature on tax and yardstick competition. For corporate taxes, the regression results suggest that European countries follow large countries in order to attract capital; for income taxes and public expenditures, instead, fiscal interactions exist but they are mainly due to yardstick competition. Finally, we have found the countries are interdependent with each others before joining the EU, and than, once they are in, they become more independent.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-03/cesifo1_wp1952.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1952.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_1952
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  1. Brueckner, Jan K., 1998. "Testing for Strategic Interaction Among Local Governments: The Case of Growth Controls," Journal of Urban Economics, Elsevier, vol. 44(3), pages 438-467, November.
  2. Wrede, Matthias, 2001. "Yardstick competition to tame the Leviathan," European Journal of Political Economy, Elsevier, vol. 17(4), pages 705-721, November.
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  8. Rosanne Altshuler & Timothy J. Goodspeed, 2002. "Follow the Leader? Evidence on European and U.S. Tax Competition," Departmental Working Papers 200226, Rutgers University, Department of Economics.
  9. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1994. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc.
  10. David E. Wildasin, 2005. "Fiscal Competition," Working Papers 2005-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  11. Büttner, Thiess, 1998. "Local Business Taxation and Competition for Capital: The Choice of the Tax Rate," ZEW Discussion Papers 98-43, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  12. Bordignon, Massimo & Cerniglia, Floriana & Revelli, Federico, 2004. "Yardstick competition in intergovernmental relationships: theory and empirical predictions," Economics Letters, Elsevier, vol. 83(3), pages 325-333, June.
  13. Baicker, Katherine, 2005. "The spillover effects of state spending," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 529-544, February.
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  15. Federico Revelli, 2001. "Spatial patterns in local taxation: tax mimicking or error mimicking?," Applied Economics, Taylor & Francis Journals, vol. 33(9), pages 1101-1107.
  16. 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.
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  19. Shroder, Mark, 1995. "Games the States Don't Play: Welfare Benefits and the Theory of Fiscal Federalism," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 183-91, February.
  20. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
  21. Timothy Besley & Anne Case, 1992. "Incumbent Behavior: Vote Seeking, Tax Setting and Yardstick Competition," NBER Working Papers 4041, National Bureau of Economic Research, Inc.
  22. Figlio, David N. & Kolpin, Van W. & Reid, William E., 1999. "Do States Play Welfare Games?," Journal of Urban Economics, Elsevier, vol. 46(3), pages 437-454, November.
  23. Bivand, Roger & Szymanski, Stefan, 1997. "Spatial dependence through local yardstick competition:: theory and testing," Economics Letters, Elsevier, vol. 55(2), pages 257-265, August.
  24. 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.
  25. Wooders, Myrna & Zissimos, Ben & Dhillon, Amrita, 2001. "Tax Competition Reconsidered," The Warwick Economics Research Paper Series (TWERPS) 622, University of Warwick, Department of Economics.
  26. Massimo Bordignon & Floriana Cerniglia & Federico Revelli, 2002. "In Search for Yardstick Competition: Property Tax Rates and Electoral Behavior in Italian Cities," CESifo Working Paper Series 644, CESifo Group Munich.
  27. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  28. Anselin, Luc & Bera, Anil K. & Florax, Raymond & Yoon, Mann J., 1996. "Simple diagnostic tests for spatial dependence," Regional Science and Urban Economics, Elsevier, vol. 26(1), pages 77-104, February.
  29. Timothy Besley & Michael Smart, 2005. "Fiscal restraints and voter welfare," LSE Research Online Documents on Economics 3769, London School of Economics and Political Science, LSE Library.
  30. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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