Fiscal Competition over Taxes and Public Inputs: Theory and Evidence

43 Pages Posted: 18 Dec 2008

See all articles by Sebastian Hauptmeier

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Ferdi Mittermaier

affiliation not provided to SSRN

Johannes Rincke

Ludwig Maximilian University of Munich (LMU); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: March 11, 2009

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 infrastructure, governments react by increasing their own spending on public inputs.

Keywords: tax competition, public input, competition, system estimation

JEL Classification: H72, H77, C72

Suggested Citation

Hauptmeier, Sebastian and Mittermaier, Ferdi and Rincke, Johannes, Fiscal Competition over Taxes and Public Inputs: Theory and Evidence (March 11, 2009). CESifo Working Paper Series No. 2499, ECB Working Paper No. 1033, Available at SSRN: https://ssrn.com/abstract=1317697

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Ferdi Mittermaier

affiliation not provided to SSRN ( email )

Johannes Rincke (Contact Author)

Ludwig Maximilian University of Munich (LMU) ( email )

Seminar for Economic Policy
Akademiestr. 1/II
Munich, D-80799
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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