Are Local Tax Rates Strategic Complements or Strategic Substitutes?
American Economic Journal: Economic Policy
vol. 11,
no. 2, May 2019
(pp. 189-224)
Abstract
The identification of strategic interactions among local governments is typically plagued by endogeneity problems. I exploit the fact that local jurisdictions located close to a state border have some neighbors in another state and instrument the tax rate of neighbor jurisdictions with the state-level tax rate of the neighboring state. I use this instrument to identify strategic personal income tax setting by local jurisdictions in Switzerland and find that tax rates are strategic substitutes. I then develop a residence-based personal income tax competition model and show that tax rates are strategic substitutes if the elasticity of the marginal utility of the public good with respect to the tax rate is above one. This is notably the case in the presence of economies of scale in the public good provision.Citation
Parchet, Raphaël. 2019. "Are Local Tax Rates Strategic Complements or Strategic Substitutes?" American Economic Journal: Economic Policy, 11 (2): 189-224. DOI: 10.1257/pol.20150206Additional Materials
JEL Classification
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H71 State and Local Taxation, Subsidies, and Revenue
- H73 State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects
- H77 Intergovernmental Relations; Federalism; Secession
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