Consumption tax competition among governments: Evidence from the United States

Jan P. A. M. Jacobs, Jenny E. Ligthart*, H. Vrijburg

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

30 Citations (Scopus)
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Abstract

The paper contributes to a small but growing literature that estimates tax reaction functions of governments competing with other governments. We analyze consumption tax competition between US states, employing a panel of state-level data for 1977-2003. More specifically, we study the impact of a state's spatial characteristics (i.e., its size, geographic position, and border length) on the strategic interaction with its neighbors. For this purpose, we calculate for each state an average effective consumption tax rate, which covers both sales and excise taxes. In addition, we pay attention to dynamics by including lagged dependent variables in the tax reaction function. We find overwhelming evidence for strategic interaction among state governments, but only partial support for the effect of spatial characteristics on tax setting. Tax competition seems to have lessened in the 1990s compared to the early 1980s.

Original languageEnglish
Pages (from-to)271-294
Number of pages24
JournalInternational Tax and Public Finance
Volume17
Issue number3
DOIs
Publication statusPublished - Jun-2010

Keywords

  • Tax competition
  • Tax reaction function
  • Consumption taxation
  • Spatial lag
  • PANEL-DATA APPROACH
  • FISCAL COMPETITION
  • COMMODITY TAXATION
  • MODEL
  • EQUILIBRIUM
  • COUNTRIES
  • MATTER

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