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

  • Teemu Lyytikäinen

    ()

    (Government Institute for Economic Research VATT & Spatial Economics Research Centre, London School of Economics)

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 neighbouring 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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File URL: http://www.ieb.ub.edu/aplicacio/fitxers/2011/11/Doc2011-35.pdf
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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2011/35.

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Length: 41 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ieb:wpaper:2011/11/doc2011-35
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