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Fiscal competition over taxes and public inputs - theory and evidence

Sebastian Hauptmeier, Ferdinand Mittermaier and Johannes Rincke ()

No 1033, Working Paper Series from European Central Bank

Abstract: We set up a model to characterize the reaction functions of governments competing for mobile capital by simultaneously setting both the business tax rate as well as the level of provision of a productive public input. Using a rich data set of local jurisdictions, we then test the predictions of the model with respect to the nature of strategic interaction among governments. Our findings from efficient estimation of a system of spatially interrelated equations for both policy instruments support the notion that local governments use both the business tax rate and public inputs to compete for capital. In particular, we find that if neighbors cut their tax rates, governments try to restore competitiveness by lowering their own tax and increasing spending on public inputs. If neighbors provide more infra-structure, governments react by increasing their own spending on public inputs. JEL Classification: H72, H77, C72

Keywords: public input competition; system estimation; tax competition (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-pbe and nep-ure
Note: 538998
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Related works:
Working Paper: Fiscal Competition over Taxes and Public Inputs: Theory and Evidence (2008) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091033

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