Are Local Tax Rates Strategic Complements or Substitutes?
Raphaël Parchet ()
ERSA conference papers from European Regional Science Association
The identification of strategic interactions among local governments is typically plagued by endogeneity problems. This paper proposes a quasi-experimental strategy to identify independent personal income tax setting by Swiss municipalities making use of the multi-tier federal system. State (cantonal) borders spatially bound the effects of canton-level fiscal reforms in areas that are otherwise highly integrated. Fiscal reforms at the canton level provide an exogenous source of variation in municipal tax rates, and are thus a valid instrument to identify strategic interactions among municipalities located at a cantonal border. In contrast to most of the existing empirical literature, I find that tax reaction functions have a negative slope and that taxes rates are strategic substitutes rather than strategic complements. This is compatible with a model of local tax setting in which governments primarily target expenditure rather than tax receipts. JEL codes: H24, H71, H77 Keywords: tax competition, fiscal federalism
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Persistent link: https://EconPapers.repec.org/RePEc:wiw:wiwrsa:ersa12p313
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