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Crossing Mountains: The Effect of Competition on the Laffer Curve

Author

Listed:
  • Hugo Miguel de Oliveira Cruz Pinto de Abreu

    (University of Porto - Faculty of Economics)

  • Elísio Fernando Moreira Brandão

    (University of Porto - Faculty of Economics)

  • Samuel Cruz Alves Pereira

    (University of Porto - Faculty of Economics)

Abstract

Regarding states and state-like entities as producers and taxation as a price, this paper connects the thoroughly studied impacts of the market structures in microeconomics to the controversial Laffer curve, suggesting that the outcome of the “taxation market” depends also on competition. By studying the determinants for Property Tax revenue for the 308 Portuguese municipalities, a general model that successfully explains tax revenue is developed. Evidence is found for the existence of a two-peaked Laffer curve in the sample, and various tests indicate that competition impacts – shifting but also changing – the Laffer curve, causing more competitive municipalities to maximize revenue at lower tax rates – i.e. lower prices - than those in a more monopolistic setting.

Suggested Citation

  • Hugo Miguel de Oliveira Cruz Pinto de Abreu & Elísio Fernando Moreira Brandão & Samuel Cruz Alves Pereira, 2014. "Crossing Mountains: The Effect of Competition on the Laffer Curve," FEP Working Papers 523, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:523
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    File URL: http://www.fep.up.pt/investigacao/workingpapers/wp523.pdf
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    References listed on IDEAS

    as
    1. Mathias Trabandt & Harald Uhlig, 2012. "How Do Laffer Curves Differ across Countries?," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 211-249, National Bureau of Economic Research, Inc.
    2. Heijman, W.J.M. & van Ophem, J.A.C., 2005. "Willingness to pay tax: The Laffer curve revisited for 12 OECD countries," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 34(5), pages 714-723, October.
    3. Toshihiro Ihori & C. Yang, 2012. "Laffer paradox, Leviathan, and political contest," Public Choice, Springer, vol. 151(1), pages 137-148, April.
    4. Robert A. McGuire & T. Norman Van Cott, 2002. "The Confederate Constitution, Tariffs, and the Laffer Relationship," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 428-438, July.
    5. repec:bla:scandj:v:85:y:1983:i:4:p:499-519 is not listed on IDEAS
    6. Henrik Hammar & Sverker C. Jagers & Katarina Nordblom, 2008. "Attitudes towards Tax Levels: A Multi-Tax Comparison," Fiscal Studies, Institute for Fiscal Studies, vol. 29(4), pages 523-543, December.
    7. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    8. José da Silva Costa & Armindo Cravalho, 2013. "Yardstick Competition among Portuguese Municipalities: The Case of Urban Property Tax (IMI)," FEP Working Papers 495, Universidade do Porto, Faculdade de Economia do Porto.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Laffer curve; Taxation; Market Structure; Competition; Municipalities; Portugal;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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