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Fiscal competition between decentralized jurisdictions, theoretical and empirical evidence

  • Clément Carbonnier

    ()

    (THEMA - Université de Cergy-Pontoise, 33 boulevard du port, F 95011 Cergy-Pontoise cedex, France)

This article provides theoretical and empirical evidence that local fiscal competition generates a bias toward low business tax rates. Furthermore, it is shown that this bias is stronger for smaller jurisdictions. First, a theoretical model is settled with private and public capital and a fixed factor. The fixed factor allows to consider differences between the jurisdictions. The results show that there exists a bias toward low tax rates due to tax competition. This bias generates an underprovision of public capital, and therefore production is smaller with tax competition than with cooperation. Moreover, the bias toward low tax rates is stronger for jurisdictions with less fixed factor. That means that tax competition generates a larger production decrease for smaller jurisdictions. The empirical part aims at estimating the bias toward low tax rates and its dependency with respect to the fixed factor. Panel regressions with temporal and individual fixed effects of the tax rates are implemented with French local data, using the creation of intercity communities. The results indicate that the bias toward low local tax rates is strong: up to 23% decrease for the smaller cities. It is also significantly decreasing with respect to the city size: there is no tax rate decrease due to tax competition for the biggest cities.

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File URL: http://www.u-cergy.fr/thema/repec/2008-17.pdf
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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-17.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-17
Contact details of provider: Postal: 33, boulevard du port - 95011 Cergy-Pontoise Cedex
Phone: 33 1 34 25 60 63
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Web page: http://thema.u-cergy.fr
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  1. Buettner, Thiess, 2001. "Local business taxation and competition for capital: the choice of the tax rate," Regional Science and Urban Economics, Elsevier, vol. 31(2-3), pages 215-245, April.
  2. Barankay, Iwan & Lockwood, Ben, 2006. "Decentralization and the Productive Efficiency of Government: Evidence from Swiss Cantons," IZA Discussion Papers 2477, Institute for the Study of Labor (IZA).
  3. Buettner, Thiess, 2003. "Tax base effects and fiscal externalities of local capital taxation: evidence from a panel of German jurisdictions," Journal of Urban Economics, Elsevier, vol. 54(1), pages 110-128, July.
  4. Andrew Haughwout & Robert Inman & Steven G. Craig & Thomas Luce, 2000. "Local Revenue Hills: Evidence from Four U. S. Cities," PIER Working Paper Archive 03-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Mar 2003.
  5. Haughwout, Andrew F. & Inman, Robert P., 2001. "Fiscal policies in open cities with firms and households," Regional Science and Urban Economics, Elsevier, vol. 31(2-3), pages 147-180, April.
  6. Todd M. Gabe & Kathleen P. Bell, 2004. "Tradeoffs between Local Taxes and Government Spending as Determinants of Business Location," Journal of Regional Science, Wiley Blackwell, vol. 44(1), pages 21-41.
  7. Thornton, John, 2007. "Fiscal decentralization and economic growth reconsidered," Journal of Urban Economics, Elsevier, vol. 61(1), pages 64-70, January.
  8. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
  9. Alberto Alesina & Enrico Spolaore, 1995. "On the Number and Size of Nations," NBER Working Papers 5050, National Bureau of Economic Research, Inc.
  10. Mutti, John & Morgan, William & Partridge, Mark, 1989. "The incidence of regional taxes in a general equilibrium framework," Journal of Public Economics, Elsevier, vol. 39(1), pages 83-107, June.
  11. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
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