Identifying Strategic Interactions in Swedish Local Income Tax Policies

Karin Edmark () and Hanna Ågren ()

No 2006:22, Working Paper Series from Uppsala University, Department of Economics

Abstract: This paper uses data on Swedish local governments to test for strategic interaction in tax setting. We make no a priori assumptions regarding the underlying behaviour of individuals, but instead attempt to test for the presence and type of underlying spatial process. First, we employ the estimation methods used in most earlier studies, however, we stress that these methods are limited in identifying the source of interaction. Hence, we make use of a number of additional, indirect predictions from the theories of tax competition and yardstick competition, in order to test for the presence of strategic interaction. Using such additional predictions of the theories serves a twofold purpose - first it helps us establish if the spatial coefficient is due to strategic interactions or merely reflecting spatial error correlation, and second, it helps identify the source of interaction. The analysis provides strong evidence for spatial dependence in tax rates among Swedish local governments. Moreover, we find weak evidence of tax competition or yardstick competition effects in the setting of tax rates.

Keywords: Local income tax; Spatial auto-correlation; Tax competition; Yardstick competition (search for similar items in EconPapers)
JEL-codes: C52 D72 H73 H77 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-ure
Date: 2006-10-05
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Related works:
Journal Article: Identifying strategic interactions in Swedish local income tax policies (2008)
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