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Vertical tax competition in Brazil: Empirical evidence for ICMS and IPI in the period 1995–2009

Rodolfo Herald da Costa Campos, Roberto Ferreira () and Rafael Kloeckner
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Rodolfo Herald da Costa Campos: Federal University of Ceará, Brazil
Rafael Kloeckner: Federal University of Ceará, Brazil

Economia, 2015, vol. 16, issue 1, 111_127

Abstract: The main objective of this study is to quantify the impact caused by changes in federal tax on the tax policy of the Brazilian states, considering the presence of horizontal tax competition between states. Using panel data covering 26 Brazilian states plus the Federal District during the period 1995–2009, two models were estimated representing the average reaction of the states in response to changes in federal tax rates. In the first model, both levels of government act simultaneously, whereas in the second model, reaction is sequential, with the federal government acting as the leader in defining its effective tax rates. The results indicate a positive and significant response of states to increases in the federal tax rate, resulting in an over-taxation of the common tax base and higher tax rates. Additional tests show that the first model is the most suitable to represent the problem analysed

Keywords: Fiscal federalism; Tax competition; Horizontal and vertical tax externalities; Reaction functions (search for similar items in EconPapers)
JEL-codes: E62 H20 H77 (search for similar items in EconPapers)
Date: 2015
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