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Tax Competition Among Local Governments: Evidence from a Property Tax Reform in Finland

Teemu Lyytikäinen

SERC Discussion Papers from Centre for Economic Performance, LSE

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 (search for similar items in EconPapers)
JEL-codes: H20 H71 H77 (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-acc, nep-geo, nep-pbe, nep-pub and nep-ure
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http://cep.lse.ac.uk/pubs/download/sercdp0082.pdf (application/pdf)

Related works:
Journal Article: Tax competition among local governments: Evidence from a property tax reform in Finland (2012) Downloads
Working Paper: Tax competition among local governments: evidence from a property tax reform in Finland (2011) Downloads
Working Paper: Tax competition among local governments: evidence from a property tax reform in Finland (2011) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cep:sercdp:0082

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