Tax Interaction Among Walloon Municipalities: Is there Room for Yardstick Competition, Intellectual Trend and Partisan Monopoly Effect?

Abstract

Three sources of strategic tax interactions among local jurisdictions are usually considered in the literature: public expenditure spill-over, tax competition and yardstick competition. However, another source has now been suggested: the intellectual trend. According to that hypothesis, politicians of the same party tend to behave similarly: incumbents of the same party mimic each other’s policies. Moreover partisan politics may also act through a monopoly power effect linked to several terms of power for the same party, consecutively: a political party is more likely to have implemented tax rates corresponding to its ideology if it has ruled the municipality several legislatures in a row.The paper proposes an empirical analysis of tax interactions among Walloon municipalities (the Southern part of Belgium) in view of discriminating among the sources of interaction. Yardstick hypothesis, intellectual trend hypothesis and potential partisan monopoly power effect are tested. Spatial econometrics tools are used along a panel of local tax rates data from 1983 to 2008 and political data. Results confirm the existence of yardstick competition among Walloon municipalities but not that of behaviors in line with the intellectual trend hypothesis. Moreover evidence is found of a partisan monopoly power effect: several successive legislatures with a sole left-wing party in power increase the tax rates. Finally the presence of an electoral cycle is also clearly documented.