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Follow the Leader? Evidence on European and U.S. Tax Competition

Listed author(s):
  • Rosanne Altshuler

    ()

    (Rutgers University, Department of Economics)

  • Timothy J. Goodspeed

    ()

    (Hunter College and CUNY Graduate Center)

This paper contributes to the small empirical literature that attempts to estimate tax reaction functions of national governments competing with other national governments. Our focus is on European countries. After presenting a simple theoretical model, we estimate reaction functions both for a pure Nash model and for a model in which the U.S. can act as a Stackelberg leader while the European countries compete with each other in a Nash way. Our empirical tests provide evidence that European countries set tax rates strategically interacting with their neighbors and following the lead of the United States. In fact, our results suggest that the tax rates of non-tax haven European countries are more responsive to changes in U.S. rates than to their own neighbor’s rates. However, we find no evidence that either the haven or non-haven countries reacted to the tax changes of the United States before 1986, the year of a major U.S. tax reform. We also reject the hypothesis that the countries in our sample have become more competitive in recent years. This is interesting given that our data span the time period during which tax competition is alleged to have become more intense.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200226.

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Date of creation: 23 Oct 2002
Handle: RePEc:rut:rutres:200226
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  1. Fuest, Clemens & Huber, Bernd & Mintz, Jack, 2005. "Capital Mobility and Tax Competition," Foundations and Trends(R) in Microeconomics, now publishers, vol. 1(1), pages 1-62, December.
  2. Rosanne Altshuler & Harry Grubert, 2005. "The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies," CESifo Working Paper Series 1613, CESifo Group Munich.
  3. Alfons Weichenrieder, 1996. "Anti-tax-avoidance provisions and the size of foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 67-81, January.
  4. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
  5. Hans-Werner Sinn, 1990. "Taxation and the Birth of Foreign Subsidiaries," NBER Working Papers 3519, National Bureau of Economic Research, Inc.
  6. Fredriksson, Per G. & Millimet, Daniel L., 2002. "Is there a 'California effect' in US environmental policymaking?," Regional Science and Urban Economics, Elsevier, vol. 32(6), pages 737-764, November.
  7. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics.
  8. Bond, E.W. & Samuelson, L., 1988. "Strategic Behavior And The Rules For International Taxation Of Capital," Papers 3-88-10, Pennsylvania State - Department of Economics.
  9. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  10. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(2), pages 107-126, March.
  11. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  12. repec:ntj:journl:v:52:y:1999:i:n._2:p:269-304 is not listed on IDEAS
  13. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-892, September.
  14. Wilson, J.D., 1990. "Tax Competition With Interregional Differences In Factor Endowments," Working Papers 4, John Deutsch Institute for the Study of Economic Policy.
  15. Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, vol. 87(1), pages 73-107, January.
  16. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
  17. Hines, James Jr., 1994. "Credit and deferral as international investment incentives," Journal of Public Economics, Elsevier, vol. 55(2), pages 323-347, October.
  18. Hines, James R. (ed.), 2001. "International Taxation and Multinational Activity," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226341736.
  19. 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.
  20. Goodspeed, Timothy J., 1999. "Tax competition and tax structure in open federal economies: evidence from OECD countries with implications for the European Union," ZEW Discussion Papers 99-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  21. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
  22. Slemrod, Joel, 2004. "Are corporate tax rates, or countries, converging?," Journal of Public Economics, Elsevier, vol. 88(6), pages 1169-1186, June.
  23. Goodspeed, Timothy J., 2000. "Tax structure in a federation," Journal of Public Economics, Elsevier, vol. 75(3), pages 493-506, March.
  24. repec:ntj:journl:v:49:y:1996:i:no._3:p:341-58 is not listed on IDEAS
  25. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(2), pages 269-304, June.
  26. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  27. Goodspeed, Timothy J., 1998. "Tax Competition, Benefit Taxes, and Fiscal Federalism," National Tax Journal, National Tax Association, vol. 51(3), pages 579-586, September.
  28. repec:ntj:journl:v:51:y:1998:i:n._3:p:579-86 is not listed on IDEAS
  29. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
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