Interaction between vertical and horizontal tax competition: evidence and some theory

MPRA Paper from University Library of Munich, Germany

Abstract: The aim of this paper is to determine to what extent and how federal taxes affect local tax decisions. Testing the impact of an increase in the federal tax on horizontal tax competition with Canada-US data for 1984--1994, we find evidence that an increase in federal tax affects horizontal tax competition. The novelty of our approach is that it indirectly tests the effect of an increase in federal tax on provincial tax, by testing whether provincial reaction to an increase in neighboring tax changes according to the federal tax level. The test allows for control of yearly macroeconomic shocks by inserting dummies for each year. These are not used in the empirical literature on vertical tax competition because they would cause perfect collinearity with the federal tax.

Keywords: horizontal externality; vertical externality; tax competition; tax rate (search for similar items in EconPapers)
JEL-codes: H77 H7 H72 H71 H73 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-ure
Date: 2007
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