The Estimation of Reaction Functions Under Tax Competition

45 Pages Posted: 7 May 2018

See all articles by Raffaele Miniaci

Raffaele Miniaci

University of Brescia - Department of Economics and Management

Paolo M. Panteghini

Department of Economics and Management; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Giulia Rivolta

University of Brescia

Date Written: March 08, 2018

Abstract

Tax competition has long been studied using panel models. According to this approach, each country’s tax rate is assumed to depend on a weighted average of the tax rates applied in the rest of the world, where weights are exogenous. As a consequence, the estimated reaction functions of countries throughout the world have the same sign. This means that all tax rates are either strategic complements or strategic substitutes. Moreover, the intensity of a country’s reaction depends on certain exogenous weights, with a unique proportional factor common across all countries. Our article departs from this standard approach and proposes a VAR model as an alternative estimation strategy. Accordingly, weights are no longer determined exogenously but rather endogenously. As such, we compare and explore the implications of the panel versus the VAR model in terms of structural contemporaneous parameters and impulse response functions. We show that results obtained with a VAR model differ from those obtained from a panel approach. In particular, we find that strategic complementarity between certain countries (with a positive slope of reaction functions) may co-exist with strategic substitutability between other countries (negative slope). Given these results, we can say that a standard panel approach is relatively restrictive and therefore can lead to unreliable estimates, and fail to provide helpful policy recommendations.

Keywords: tax competition, VAR models, Bayesian methods

JEL Classification: C540, H250, E620

Suggested Citation

Miniaci, Raffaele and Panteghini, Paolo M. and Rivolta, Giulia, The Estimation of Reaction Functions Under Tax Competition (March 08, 2018). CESifo Working Paper Series No. 6928, Available at SSRN: https://ssrn.com/abstract=3170840

Raffaele Miniaci

University of Brescia - Department of Economics and Management ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Paolo M. Panteghini (Contact Author)

Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

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

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Giulia Rivolta

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

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