IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v124y2016icp178-201.html
   My bibliography  Save this article

Yardstick competition and partial coordination: Exploring the empirical distribution of local business tax rates

Author

Listed:
  • Buettner, Thiess
  • von Schwerin, Axel

Abstract

This paper explores a striking form of tax policy interdependence that can be observed in the German federation. Though municipalities enjoy discretion in setting the local business tax rate, large fractions of municipalities – in some states even the majority – set identical tax rates. Our analysis shows that this tax-rate “bunching” is not the result of federal or state-level institutions. Possible explanations rest on partial coordination and yardstick competition. The role of the former is exemplified by the finding that small jurisdictions and jurisdictions sharing the same county are more likely to engage in “bunching”. Yardstick competition seems also relevant since jurisdictions for which strategic tax-setting should be associated with larger gains and lower cost are in fact more likely to set identical tax rates.

Suggested Citation

  • Buettner, Thiess & von Schwerin, Axel, 2016. "Yardstick competition and partial coordination: Exploring the empirical distribution of local business tax rates," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 178-201.
    • Handle: RePEc:eee:jeborg:v:124:y:2016:i:c:p:178-201
    DOI: 10.1016/j.jebo.2015.10.013
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268115002802
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2015.10.013?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Wildasin, David E., 2003. "Fiscal competition in space and time," Journal of Public Economics, Elsevier, vol. 87(11), pages 2571-2588, October.
    2. Jonathan Thomas & Tim Worrall, 1994. "Foreign Direct Investment and the Risk of Expropriation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 81-108.
    3. Burbidge, John B. & James A. DePater & Gordon M. Meyers & Abhijit Sengupta, 1997. "A Coalition-Formation Approach to Equilibrium Federations and Trading Blocs," American Economic Review, American Economic Association, vol. 87(5), pages 940-956, December.
    4. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," European Economic Review, Elsevier, vol. 34(2-3), pages 489-504, May.
    5. Keen, Michael & Konrad, Kai A., . "The theory of international tax competition and coordination," Chapters in Economics,, University of Munich, Department of Economics.
    6. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-581, June.
    7. Roberto Cardarelli & Emmanuelle Taugourdeau & Jean‐Pierre Vidal, 2002. "A Repeated Interactions Model of Tax Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(1), pages 19-38, January.
    8. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
    9. Gordon, Roger H, 1992. "Can Capital Income Taxes Survive in Open Economies?," Journal of Finance, American Finance Association, vol. 47(3), pages 1159-1180, July.
    10. Konrad, Kai A. & Schjelderup, Guttorm, 1999. "Fortress Building in Global Tax Competition," Journal of Urban Economics, Elsevier, vol. 46(1), pages 156-167, July.
    11. Marco Cotenaro & Jean-Pierre Vidal, 2006. "Implicit tax co-ordination under repeated policy interactions," Recherches économiques de Louvain, De Boeck Université, vol. 72(1), pages 5-18.
    12. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
    13. Rosanne Altshuler & Timothy J. Goodspeed, 2015. "Follow the Leader? Evidence on European and US Tax Competition," Public Finance Review, , vol. 43(4), pages 485-504, July.
    14. Revelli, Federico, 2008. "Performance competition in local media markets," Journal of Public Economics, Elsevier, vol. 92(7), pages 1585-1594, July.
    15. Robin Dubin, 1995. "Estimating Logit Models with Spatial Dependence," Advances in Spatial Science, in: Luc Anselin & Raymond J. G. M. Florax (ed.), New Directions in Spatial Econometrics, chapter 10, pages 229-242, Springer.
    16. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    17. Peter Egger & Marko Koethenbuerger, 2010. "Government Spending and Legislative Organization: Quasi-experimental Evidence from Germany," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 200-212, October.
    18. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    19. Claudia Keser & Bodo Vogt, 2000. "Why Do Experimental Subjects Choose an Equilibrium which Is Neither Payoff Nor Risk Dominant?," CIRANO Working Papers 2000s-34, CIRANO.
    20. Hendrik Vrijburg & Ruud A. de Mooij, 2010. "Enhanced Coorporation in an asymmetric model of Tax Competition," Working Papers 1002, Oxford University Centre for Business Taxation.
    21. Johannes Becker & Ronald B. Davies, 2015. "Learning to Tax ?- Interjurisdictional Tax Competition under Incomplete Information," Working Papers 201519, School of Economics, University College Dublin.
    22. Bordignon, Massimo & Cerniglia, Floriana & Revelli, Federico, 2003. "In search of yardstick competition: a spatial analysis of Italian municipality property tax setting," Journal of Urban Economics, Elsevier, vol. 54(2), pages 199-217, September.
    23. repec:syd:wpaper:9713 is not listed on IDEAS
    24. David E. Wildasin, 1994. "Income Redistribution and Migration," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 637-656, August.
    25. Asmus Olsen, 2013. "The politics of digits: evidence of odd taxation," Public Choice, Springer, vol. 154(1), pages 59-73, January.
    26. Revelli, Federico, 2002. "Local taxes, national politics and spatial interactions in English district election results," European Journal of Political Economy, Elsevier, vol. 18(2), pages 281-299, June.
    27. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
    28. Hautsch, Nikolaus & Klotz, Stefan, 2003. "Estimating the neighborhood influence on decision makers: theory and an application on the analysis of innovation decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 52(1), pages 97-113, September.
    29. George R. Zodrow & Peter Mieszkowski, 2019. "Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Goods," World Scientific Book Chapters, in: George R Zodrow (ed.), TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow, chapter 17, pages 525-542, World Scientific Publishing Co. Pte. Ltd..
    30. Davide Wildasin, 1987. "Federal-State-Local Fiscal Relations: A Review of the Treasury Report," Public Finance Review, , vol. 15(4), pages 472-499, October.
    31. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-892, September.
    32. Keser, Claudia & Vogt, Bodo, 2000. "Why do experimental subjects choose an equilibrium which is neither risk nor payoff dominant," Papers 00-40, Sonderforschungsbreich 504.
    33. Becker, Sascha O. & Egger, Peter H. & Merlo, Valeria, 2012. "How low business tax rates attract MNE activity: Municipality-level evidence from Germany," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 698-711.
    34. Bordignon, Massimo & Cerniglia, Floriana & Revelli, Federico, 2004. "Yardstick competition in intergovernmental relationships: theory and empirical predictions," Economics Letters, Elsevier, vol. 83(3), pages 325-333, June.
    35. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
    36. Konrad, Kai A., 2009. "Strategy and Dynamics in Contests," OUP Catalogue, Oxford University Press, number 9780199549603.
    37. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    38. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March.
    39. Wrede, Matthias, 2001. "Yardstick competition to tame the Leviathan," European Journal of Political Economy, Elsevier, vol. 17(4), pages 705-721, November.
    40. Keser, Claudia & Vogt, Bodo, 0000. "Why do experimental subjects choose an equilibrium which is neither risk nor payoff dominant," Sonderforschungsbereich 504 Publications 00-40, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    41. Federico Revelli, 2005. "On Spatial Public Finance Empirics," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 475-492, August.
    42. Fredriksson, Per G. & Millimet, Daniel L., 2002. "Strategic Interaction and the Determination of Environmental Policy across U.S. States," Journal of Urban Economics, Elsevier, vol. 51(1), pages 101-122, January.
    43. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    44. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    45. Brueckner, Jan K. & Saavedra, Luz A., 2001. "Do Local Governments Engage in Strategic Property-Tax Competition?," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(2), pages 203-230, June.
    46. Marco CATENARO & Jean-Pierre VIDAL, 2006. "Implicit tax co-ordination under repeated policy interactions," Discussion Papers (REL - Recherches Economiques de Louvain) 2006011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    47. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 642-664, August.
    48. Pope, Robin & Selten, Reinhard & Kube, Sebastian, 2009. "Nominalist Heuristics and Economic Theory," Bonn Econ Discussion Papers 17/2009, University of Bonn, Bonn Graduate School of Economics (BGSE).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Albert Argilaga & Jijian Fan, 2022. "Optimal Policymaking under Yardstick Vote: An Experimental Study," Games, MDPI, vol. 13(3), pages 1-24, May.
    2. Sebastian Blesse & Philipp Lergetporer & Justus Nover & Katharina Werner, 2023. "Transparency and Policy Competition: Experimental Evidence from German Citizens and Politicians," Rationality and Competition Discussion Paper Series 387, CRC TRR 190 Rationality and Competition.
    3. Giuseppe Di Liddo & Annalisa Vinella, 2022. "Asymmetric yardstick competition: traditional procurement versus public-private partnerships," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 8(3), pages 669-695, November.
    4. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working papers of CATT hal-02939340, HAL.
    5. Di Liddo, Giuseppe & Morone, Andrea, 2017. "Yardstick competition and fiscal disparities: An experimental study," Economics Letters, Elsevier, vol. 159(C), pages 134-137.
    6. Bonev, Petyo & Glachant, Matthieu & Söderberg, Magnus, 2022. "Implicit yardstick competition between heating monopolies in urban areas: Theory and evidence from Sweden," Energy Economics, Elsevier, vol. 109(C).
    7. Trojanek, Maria & Kisiala, Wojciech & Trojanek, Radoslaw, 2021. "Do local governments follow their neighbours’ tax strategies? Tax mimicking amongst Polish municipalities," Land Use Policy, Elsevier, vol. 108(C).
    8. Besart Avdiu, 2019. "Information Frictions and Tax Inertia," Economics Bulletin, AccessEcon, vol. 39(3), pages 2210-2220.
    9. Geschwind, Stephan & Roesel, Felix, 2022. "Taxation under direct democracy," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 536-554.
    10. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers hal-02939340, HAL.
    11. Tao, Peng & Gong, Feng & Zhu, Kaiyue, 2023. "Tax competition among local governments: Evidence from the spillovers of location-based tax incentives in China," China Economic Review, Elsevier, vol. 82(C).
    12. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working papers of CATT hal-02939399, HAL.
    13. Florence TOUYA, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers 2015-2016_12, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
    14. Bin Wu & Xuefei Xu & Zhenzhong Feng, 2018. "Investment Promotion, Fiscal Competition and Economic Growth Sustainability," Sustainability, MDPI, vol. 10(1), pages 1-12, January.
    15. Zdražil Pavel & Pernica Bohuslav, 2021. "Stimuli contributing to local property taxation – with the focus on spatial effects of industry and functional urban areas," Central European Journal of Public Policy, Sciendo, vol. 15(1), pages 55-66, June.
    16. Alexander Klein & Guy Tchuente, 2020. "Spatial Differencing for Sample Selection Models with Unobserved Heterogeneity," Papers 2009.06570, arXiv.org.
    17. Florence TOUYA, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers 2015-2016_11, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
    18. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers hal-02939399, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chirinko, Robert S. & Wilson, Daniel J., 2017. "Tax competition among U.S. states: Racing to the bottom or riding on a seesaw?," Journal of Public Economics, Elsevier, vol. 155(C), pages 147-163.
    2. Thomas Eichner & Rüdiger Pethig, 2018. "Self-enforcing capital tax coordination," Journal of Business Economics, Springer, vol. 88(7), pages 915-940, September.
    3. Michael P. Devereux & Simon Loretz, 2013. "What Do We Know About Corporate Tax Competition?," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(3), pages 745-774, September.
    4. Thierry Madiès & Sonia Paty & Yvon Rocaboy, 2005. "Externalités fiscales horizontales et verticales. Où en est la théorie du fédéralisme financier ?," Revue d'économie politique, Dalloz, vol. 115(1), pages 17-63.
    5. Zodrow, George R, 2003. "Tax Competition and Tax Coordination in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(6), pages 651-671, November.
    6. Rosella Levaggi & Paolo M. Panteghini, 2021. "Public expenditure spillovers: an explanation for heterogeneous tax reaction functions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(3), pages 497-514, June.
    7. Wang, Wenming & Kawachi, Keisuke & Ogawa, Hikaru, 2017. "Does equalization transfer enhance partial tax cooperation?," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 431-443.
    8. Brangewitz, Sonja & Brockhoff, Sarah, 2017. "Sustainability of coalitional equilibria within repeated tax competition," European Journal of Political Economy, Elsevier, vol. 49(C), pages 1-23.
    9. Federico Revelli, 2005. "On Spatial Public Finance Empirics," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 475-492, August.
    10. Blesse, Sebastian & Martin, Thorsten, 2015. "Let's stay in touch - evidence on the role of social learning in local tax interactions," ZEW Discussion Papers 15-081, ZEW - Leibniz Centre for European Economic Research.
    11. Cassette, Aurélie & Paty, Sonia, 2008. "Tax competition among Eastern and Western European countries: With whom do countries compete?," Economic Systems, Elsevier, vol. 32(4), pages 307-325, December.
    12. Miniaci Raffaele & Panteghini Paolo M. & Rivolta Giulia, 2022. "The estimation of reaction functions under tax competition," German Economic Review, De Gruyter, vol. 23(2), pages 301-339, May.
    13. Hendrik Vrijburg & Ruud Mooij, 2016. "Tax rates as strategic substitutes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 2-24, February.
    14. Sanz-Córdoba, Patricia, 2020. "The role of infrastructure investment and factor productivity in international tax competition," Economic Modelling, Elsevier, vol. 85(C), pages 30-38.
    15. Michela Redoano, 2007. "Fiscal Interactions Among European Countries. Does the EU Matter?," CESifo Working Paper Series 1952, CESifo.
    16. Sandy Fréret & Denis Maguain, 2017. "The effects of agglomeration on tax competition: evidence from a two-regime spatial panel model on French data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 1100-1140, December.
    17. Matthieu Leprince & Sonia Paty & Emmanuelle Reulier, 2005. "Choix d'imposition et interactions spatiales entre collectivités locales. Un test sur les départements français," Recherches économiques de Louvain, De Boeck Université, vol. 71(1), pages 67-93.
    18. Kempf, Hubert & Rota-Graziosi, Grégoire, 2010. "Endogenizing leadership in tax competition," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 768-776, October.
    19. Raffaella SANTOLINI, 2007. "An Empitical Analysis of Political and Informative Trends on Municipalities of an Italian Region," Working Papers 294, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    20. Itaya, Jun-ichi & Okamura, Makoto & Yamaguchi, Chikara, 2014. "Partial tax coordination in a repeated game setting," European Journal of Political Economy, Elsevier, vol. 34(C), pages 263-278.

    More about this item

    Keywords

    Local business tax; Tax competition; Yardstick competition; Partial tax coordination; Location; Asymmetric information;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:124:y:2016:i:c:p:178-201. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.