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Public expenditure spillovers: an explanation for heterogeneous tax reaction functions

Rosella Levaggi and Paolo M. Panteghini ()
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Paolo M. Panteghini: University of Brescia

International Tax and Public Finance, 2021, vol. 28, issue 3, No 2, 497-514

Abstract: Abstract In this article, we show that spillovers may provide an alternative explanation for the heterogeneity of tax reaction functions under tax competition. In particular, we assume the existence of $$n\ge 2$$ n ≥ 2 jurisdictions, which compete to attract mobile capital in a context where public expenditure produces spillovers. We show that the latter can lead to asymmetric responses. For instance, jurisdiction i may react positively to a change in the tax rate of jurisdiction j and negatively to the change in jurisdiction z. From a policy point of view, these findings are helpful to understand the mixed results found by the empirical literature, and to analyse the tax reaction functions of city centres and suburban jurisdictions.

Keywords: Tax competition; Spillovers; Asymmetric reaction Functions (search for similar items in EconPapers)
JEL-codes: H2 H25 H4 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Public Expenditure Spillovers: An Explanation for Heterogeneous Tax Reaction Functions (2018) Downloads
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DOI: 10.1007/s10797-020-09620-7

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