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Tax competition among local governments: evidence from a property tax reform in Finland

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  • Lyytikäinen, Teemu
Abstract
This paper uses a Finnish policy intervention to study tax competition among local governments. Changes in the statutory lower limits to the property tax rates are used as a source of exogenous variation to estimate the responses of municipalities to tax rates in their neighbouring municipalities. I do not find evidence of interdependence in property tax rates among Finnish municipalities. The results are in contrast to the earlier empirical literature, using data from other countries, that has mainly found positive interdependence in tax rates. I compare the causal estimates based on the policy change to the commonly used Spatial Lag estimates and Spatial Instrumental Variables estimates, which are based on highly restrictive assumptions. The comparisons suggest that the standard spatial econometrics methods may have a tendency to overestimate the degree of interdependence in tax rates.

Suggested Citation

  • Lyytikäinen, Teemu, 2011. "Tax competition among local governments: evidence from a property tax reform in Finland," Working Papers 26, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:26
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    More about this item

    Keywords

    Property tax; tax competition; fiscal interaction; instrumental variables; spatial econometrics; Local public economics; Kunnallistalous; Taxation; Verotus; Policy analysis and modelling; Päätöksenteon tuki ja mallintaminen; H200 - Taxation; Subsidies; and Revenue: General; H710 - State and Local Taxation; Subsidies; and Revenue; H770 - Intergovernmental Relations; Federalism;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • 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

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