Public Expenditure Spillovers: An Explanation for Heterogeneous Tax Reaction Functions

20 Pages Posted: 21 Feb 2019

See all articles by Rosella Levaggi

Rosella Levaggi

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)

Date Written: 2018

Abstract

This article provides a possible explanation for the heterogeneity of tax reaction functions under tax competition. In particular, we assume the existence of three jurisdictions, i, j and z, as well as of spillovers. Given this simple framework, we show that if jurisdictions compete to attract mobile capital, spillovers can lead to asymmetric responses. In fact, jurisdiction i may react positively to a change in the tax rate of jurisdiction j and negatively to the change occurred in jurisdiction z. These findings are helpful to understand the mixed results of the empirical literature. Moreover, they have policy implications in that they explain the lack of tax convergence among jurisdictions. In particular, if at least some tax reaction functions have a negative slope, there are no symmetric equilibria, and the well-known tax-cut-cum-base-base-broadening policy would fail to hold.

Keywords: tax competition, spillovers, asymmetric reaction functions

JEL Classification: H250, H200, H400

Suggested Citation

Levaggi, Rosella and Panteghini, Paolo M., Public Expenditure Spillovers: An Explanation for Heterogeneous Tax Reaction Functions (2018). CESifo Working Paper No. 7290, Available at SSRN: https://ssrn.com/abstract=3338615

Rosella Levaggi (Contact Author)

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

Via San Faustino 74B
Brescia, 25122
Italy
+39 03 0298 8825 (Phone)
+39 03 0298 8837 (Fax)

HOME PAGE: http://www.eco.unibs.it/segdse/rlev/index.htm

Paolo M. Panteghini

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

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