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Are Local Tax Rates Strategic Complements or Strategic Substitutes?

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  • Raphael Parchet

    () (IRE and IdEP, Università della Svizzera italiana, Lugano, Switzerland)

Abstract

The identification of strategic interactions among local governments is typically plagued by endogeneity problems. This paper proposes an identification strategy that makes use of a multi-tier federal system. State-level fiscal reforms provide an arguably exogenous source of variation in tax rates of local jurisdictions. Moreover, state borders spatially bound the effects of state-level fiscal reforms across areas that are otherwise highly integrated. Using the fact that local jurisdictions located close to a state border have some neighbors in another state, I propose to instrument the (average) tax rate of neighbor jurisdictions with the state-level tax rate of the neighboring state. I use this instrument to identify strategic personal income tax setting by local jurisdictions in Switzerland. In contrast to most of the existing empirical literature and to all results based on standard instruments, I find that tax rates are strategic substitutes in most cases. Tax rates are found to be strategic complements only in the context of large tax cuts.

Suggested Citation

  • Raphael Parchet, 2014. "Are Local Tax Rates Strategic Complements or Strategic Substitutes?," IdEP Economic Papers 1407, USI Università della Svizzera italiana.
  • Handle: RePEc:lug:wpidep:1407
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    File URL: http://doc.rero.ch/record/211446/files/wp1407.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chirinko, Robert S. & Wilson, Daniel J., 2017. "Tax competition among U.S. states: Racing to the bottom or riding on a seesaw?," Journal of Public Economics, Elsevier, vol. 155(C), pages 147-163.
    2. repec:kap:itaxpf:v:24:y:2017:i:6:d:10.1007_s10797-016-9429-9 is not listed on IDEAS
    3. Isabel Z. Martinez & Emmanuel Saez & Michael Siegenthaler, 2018. "Intertemporal Labor Supply Substitution? Evidence from the Swiss Income Tax Holidays," NBER Working Papers 24634, National Bureau of Economic Research, Inc.
    4. repec:kap:itaxpf:v:24:y:2017:i:6:d:10.1007_s10797-017-9446-3 is not listed on IDEAS
    5. Mariana Lopes da Fonseca, 2017. "Tax Mimicking in Local Business Taxation: Quasi-experimental Evidence from Portugal," CESifo Working Paper Series 6647, CESifo Group Munich.
    6. Slotwinski, Michaela & Schmidheiny, Kurt, 2014. "Behavioral Responses to Local Tax Rates: Quasi-Experimental Evidence from a Foreigners Tax Scheme in Switzerland," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100292, Verein für Socialpolitik / German Economic Association.
    7. Slotwinski, Michaela & Stutzer, Alois, 2015. "The Deterrent Effect of Voting Against Minarets: Identity Utility and Foreigners' Location Choice," IZA Discussion Papers 9497, Institute for the Study of Labor (IZA).
    8. Marius Brülhart & Jonathan Gruber & Matthias Krapf & Kurt Schmidheiny, 2016. "Taxing Wealth: Evidence from Switzerland," CESifo Working Paper Series 5966, CESifo Group Munich.
    9. Brülhart, Marius & Bucovetsky, Sam & Schmidheiny, Kurt, 2015. "Taxes in Cities," Handbook of Regional and Urban Economics, Elsevier.
    10. Roller, Marcus & Schmidheiny, Kurt, 2016. "Effective Tax Rates and Effective Progressivity in a Fiscally Decentralized Country," CEPR Discussion Papers 11152, C.E.P.R. Discussion Papers.
    11. David Staubli, 2018. "The Elasticity of Corporate Income: Panel Data Evidence from Switzerland," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 18.01, Université de Lausanne, Faculté des HEC, DEEP.
    12. repec:ses:arsjes:2017-ii-1 is not listed on IDEAS
    13. Martinez, Isabel Z., 2016. "Beggar-Thy-Neighbour Tax Cuts: Mobility after a Local Income and Wealth Tax Reform in Switzerland," Annual Conference 2016 (Augsburg): Demographic Change 145643, Verein für Socialpolitik / German Economic Association.
    14. Philipowski, Robert, 2015. "Comparison of Nash and evolutionary stable equilibrium in asymmetric tax competition," Regional Science and Urban Economics, Elsevier, vol. 51(C), pages 7-13.
    15. repec:kap:itaxpf:v:25:y:2018:i:1:d:10.1007_s10797-017-9449-0 is not listed on IDEAS
    16. Hendrik Vrijburg & Ruud Mooij, 2016. "Tax rates as strategic substitutes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 2-24, February.
    17. repec:spr:sjecst:v:153:y:2017:i:2:d:10.1007_bf03399435 is not listed on IDEAS
    18. Yu, Jihai & Zhou, Li-An & Zhu, Guozhong, 2016. "Strategic interaction in political competition: Evidence from spatial effects across Chinese cities," Regional Science and Urban Economics, Elsevier, vol. 57(C), pages 23-37.
    19. repec:kap:itaxpf:v:24:y:2017:i:4:d:10.1007_s10797-017-9461-4 is not listed on IDEAS

    More about this item

    Keywords

    tax competition; fiscal federalism;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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