Tax competition and tax structure in open federal economies: Evidence from OECD countries with implications for the European Union

Tax competition arguments suggest that governments that operate in an open economy (such as local governments) should not and will not rely on non-benefit taxes, such as the income tax. Yet we observe reliance on income taxes by local governments in many countries, and such reliance changes over time. Evidence from a panel data set of 13 OECD countries over the period 1975-1984 suggests that competition between levels of government (resulting in a vertical fiscal externality) and between governments at the same level (resulting in a horizontal fiscal externality) provide some economic rationale for these changes. Moreover, the evidence indicates that the vertical and horizontal fiscal externalities interact. These results have some interesting implications for fiscal policy in the European Union, particularly as the EU continues to evolve. One implication for the EU is that enlargement that increases tax base disparities within the EU (and is not accompanied by an EU-level income tax) will tend to lower national income tax rates, although this must be qualified because it also depends on the mobility of the population. A second implication is that fiscal expansion of the EU to include an EU-level income tax may tend to lower the reliance of national governments on income taxes through the vertical externality, but may also tend to equalize tax bases across countries, and so increase reliance on national income taxes through the horizontal externality.     

Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada

We study corporate income taxation when firms operating in multiple jurisdictions can shift income using tax planning strategies. Because income of corporate groups is not consolidated for tax purposes in Canada, firms may use financial techniques, such as lending among affiliates, to reduce subnational corporate taxes. A simple theoretical model shows how income shifting affects real investment, government revenues, and tax base elasticities, depending on whether firms must allocate income to provinces or not. We then analyze data from administrative tax records to compare the behavior of corporate subsidiaries that may engage in income shifting to comparable firms that must use the statutory allocation formula to determine their taxable income in each province. The evidence suggests that income shifting has pronounced effects on provincial tax bases. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for “income shifting” firms is 4.9, compared with 2.3 for other, comparable firms.     

Fiscal decentralization and tax collection: evidence from the rural property tax in Brazil

The present paper investigates whether the decentralization of the rural land property tax (ITR) in Brazil increases the aggregate volume of tax collection from this source. We apply a difference-in-differences strategy where treatment is defined as the switch from a federal administration to the decentral management of the ITR by a municipality. The panel data from 2002 to 2017 show that decentralization leads to an average increase in overall ITR collection by about 42% in the first year, which rises to 109% in the 8th year. Our results are robust to balancing with entropy weights, the anticipation of treatment as well as the multi-period staggered timing of the ITR decentralization. Due to these peculiarities of our research design, we show that the increase in ITR collection is related to a more efficient tax management, i.e., a rigorous implementation and charge of tax duties.     

Agglomeration, integration and tax harmonisation

Consideration of agglomeration reverses standard theoretical propositions in international tax competition. We show greater economic integration may lead to a ‘race to the top’ rather than a race to the bottom. Also, ‘split the difference’ tax harmonisation may harm both nations, a result that may explain why real-world tax harmonisation is rare. The key is that industrial concentration creates ‘agglomeration rent.’ The ‘core’ region can thus charge a higher tax rate without losing capital. The size of such rent is a bell-shaped function of the level of integration, so the tax gap first widens before narrowing as integration increases.     

Globalisation, capital mobility and tax competition: theory and evidence for OECD countries

Are the predictions of tax competition theory wrong? While the tax competition literature predicts that taxes on income from capital decrease with increasing globalisation, past empirical studies on various data find contradicting evidence. By using different data and additional elements of economic theory, this paper aims to challenge the empirical contributions. For a panel of 14 OECD countries and for the period 1967–1996, we find that globalisation has indeed a negative and significant impact on corporate taxes. Furthermore, globalisation tends to raise labour taxes and social expenditures. As a consequence, the so-called “efficiency” and “compensation” hypotheses of globalisation are not competing, but rather, both appear to apply at the same time. Efficiency has an impact on the tax-mix, whereas compensation is provided through increased social expenditures.     

Voting with your feet: Political competition and internal migration in the United States

Do people “vote with their feet” in response to a lack of political competition? Since political competition is associated with higher growth and welfare, with the free movement of labour, we argue that it should also encourage inward migration. We test this hypothesis by using data from the US and find a strong positive relation between political competition and net migration. This result is robust to alternative specifications, alternative samples and addressing endogeneity using the Voting Rights Act to instrument for political competition. The effect is economically large, specifically, we find that an increase in political competition in the order of magnitude observed in US Southern states during the post-war period leads to an increase in net migration by between 27 and 44 individuals per 1000 population.     

Intergovernmental transfers and political competition measured by pivotal probability - Evidence from Hungary

I estimate the effects of political competition on the allocation of intergovernmental transfers to Hungarian municipalities between 1998 and 2006. The intergovernmental transfers were intended to finance schooling, elder care, and administrative needs in municipalities. Rather than use closeness of the dominant blocks' vote share, which is the standard measure of political competition, I instead employ (Myerson, 2000)'s pivotal probabilities, calculated at the municipality level. As a result, the number of voters, in addition to the vote difference, is taken into account when describing political competition at the municipal level. I argue that under mixed-member proportional systems, as well as under proportional systems in general, pivotal probability reflects the political reality better than closeness can. I find evidence that swing municipalities in villages are targeted and, ceteris paribus, that poorer regions receive larger transfer amounts than other areas.     

Competition,benchmarking, and electoral success: Evidence from 69 years of the German Bundestag

The German electoral system ensures that there is always at least one federal legislator per constituency. This legislator can face competition from additionally elected competitors to the Bundestag from precisely the same constituency. The existence of several legislators per constituency allows voters to benchmark their quality against each other. We analyze the causal impact of having more elected competitors from the same constituency on legislators’ personal success versus the success of their parties. Our data cover the legislative terms in the German Bundestag and federal elections in the period 1953–2021. In our analysis, we rely on exogenous variation in elected competitors by investigating changes induced by legislators who leave the Bundestag during the legislative period and their respective replacement candidates as instrumental variables. We find that legislators are less successful in elections when they are exposed to elected competitors from the same constituency. The results suggest that benchmarking possibilities are relevant for voters to evaluate their representatives.     

Non-discriminatory donation relief and strategic commitment under political competition

Tax relief for private donations towards the provision of collective goods can protect minorities from majority-driven outcomes in which tax revenues are exclusively used to finance the provision of public goods that are only valued by the majority. In this paper we show that non-discriminatory tax relief for private donations can arise in political equilibrium as a strategic commitment device aimed at creating and supporting political alliances that would not otherwise be able to coalesce.     

Term limit extension and electoral participation. Evidence from a diff-in-discontinuities design at the local level in Italy

We study the effect of term limits on voter turnout in Italian local elections. Since 2014 the Italian law allows mayors in municipalities with a population size lower than 3,000 inhabitants to re-run for a third term, whereas mayors in cities with a number of residents above the cut-off still face a two-term limit. The introduction of the reform permits us to implement a difference-in-discontinuities design exploiting the before/after with the discontinuous policy change. We find that voters negatively react to the introduction of the reform: electoral participation decreases by about 5 percentage points in municipalities eligible to the treatment compared to municipalities in the control group. This negative effect is essentially driven by a decrease in the political competition. We also find that relaxing term limits does not improve the quality of politicians running for election.     

Parties,divided government,and infrastructure expenditures: Evidence from U.S. states

This paper examines the impact of parties and divided government on infrastructure expenditures for transportation, education, and social services in U.S. states. As infrastructure expenditures are considered a bi-partisan priority, we hypothesize that divided governments expand infrastructure spending compared to governments under true Democratic or Republican control. We test this hypothesis using U.S. state-level data over the period 1970 to 2008 and find that divided governments indeed increase expenditures for these budget categories. Specifically, divided governments spend more on transportation than unified Democratic governments, and more on education and social services than unified Republican governments. The effect is most pronounced for the core infrastructure of transportation and even stronger when only looking at capital outlays instead of total expenditures.     

Crime,incentives and political effort: Evidence from India

Political representatives with criminal backgrounds are considered a great problem in many countries. In India, public disclosure of the large share of politicians currently facing criminal charges has sparked a heated public debate and emerging literature assessing the causes and effects. We develop two hypotheses based on our theoretical considerations. Based on the coding of published affidavits and a comprehensive set of three proxies to measure effort in the 14th Lok Sabha over the 2004–2009 legislative period, we put these hypotheses to an empirical test. Members of the parliament (MPs) facing criminal accusations exhibit on average about 5% lower attendance rates and lower utilization rates in a local area development fund, but only insignificantly lower parliamentary activity. In line with our hypotheses, these differences decline in the development level of the constituency - a proxy for higher rent-seeking possibilities and monitoring intensity. We argue and demonstrate why these negative relations should constitute an upper bound estimate of the causal effect, and show that even under conservative assumptions the effect is unlikely to be caused by unaccounted selection-bias.