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

Teemu Lyytikäinen

No 26, Working Papers from VATT Institute for Economic Research

Abstract: 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.

Keywords: Property tax, tax competition, fiscal interaction, instrumental variables, spatial econometrics, Local public economics, Kunnallistalous, Taxation, Verotus, Policy analysis and modelling, Päätöksenteon tuki ja mallintaminen, H200 - Taxation, Subsidies, and Revenue: General, H710 - State and Local Taxation, Subsidies, and Revenue, H770 - Intergovernmental Relations; Federalism, (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-acc, nep-geo, nep-pbe, nep-pub and nep-ure
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Citations: View citations in EconPapers (1)

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https://www.doria.fi/handle/10024/148765

Related works:
Journal Article: Tax competition among local governments: Evidence from a property tax reform in Finland (2012)
Working Paper: Tax Competition Among Local Governments: Evidence from a Property Tax Reform in Finland (2011)
Working Paper: Tax competition among local governments: evidence from a property tax reform in Finland (2011)
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