Strategic fiscal interaction across borders: Evidence from French and German local governments along the Rhine Valley

Abstract

This article contributes to the literature on local tax interactions. Its novelty lies in its focus on the interactions of local governments across national borders. We use panel data for the French and German municipalities in the Rhine Valley for the period 2000–2007. The local governments of each country influence firms’ overall tax burdens, but the tax instruments available at the local level differ. We estimate panel models that distinguish between the effects of competing municipalities belonging to the same country and belonging to the other country. Our empirical model shows that local jurisdictions along borders choose their business tax rates based on those of their domestic neighbors and that foreign fiscal policy does not have an impact on the local domestic tax setting behavior in these contexts.