Local Tax Competition Research Articles

Tax Authorities and Local Government Development in Poland

Purpose of the study: The purpose of this article is to examine the influence that tax authorities have had on the growth and progress of local governments in Poland. Through an analysis of the financial autonomy, degree of decentralisation, and local tax policy of Polish municipalities, this research endeavours to illuminate the correlation between tax authorities and the growth of local governments in Poland.
 Methodology: This article conducts a comprehensive literature review on the subject of local tax competition studies in Poland. In addition, empirical experiments conducted on Polish data to determine the concept's applicability throughout the region are included.
 Main findings: Based on the analysis, Poland holds a considerable level of financial autonomy, which is attributed to its authority in determining local tax rates and its freedom to finance investment initiatives. Moreover, research has revealed that the fiscal policies implemented by neighboring municipalities in Poland exert a substantial influence on the choices made by local legislators. This suggests that competition and local tax policy have a significant impact on the evolution of local administrations across the nation.
 Application of the study: The findings of this study have significant implications for policymakers and local authorities in Poland. Understanding the impact of tax authorities on the development of local governments can help in formulating effective fiscal policies and strategies for sustainable development. By recognising the influence of tax regulations and revenue diversification on fiscal sustainability, policymakers can make informed decisions regarding local tax policies and financial autonomy.
 Originality/Novelty of the study: In the article, the author emphasised the examination of the impact of tax authorities on the development of local governments in Poland, particularly in the context of the limited tax autonomy of Polish local authorities. The study delves into the unique challenges and opportunities that arise from this restricted tax autonomy and how it influences the fiscal sustainability and development of local governments in the country. Additionally, the analysis of the effects of municipal tax policy, including the influence of neighbouring municipalities' tax rates on local politicians' decisions, provides valuable insights into the dynamics of tax competition and its implications for local governance in Poland.

Decentralization of environmental management and enterprises’ environmental technology innovation: evidence from China

ABSTRACT We construct an environmental decentralization index and use spatial econometric modeling to test the government’s role in promoting environmental technology innovation at the enterprise level. The results show that a moderate increase in the degree of environmental decentralization is conducive to promoting local enterprises’ environmental innovation and avoiding excessive distortions caused by externalities. Further investigation reveals that the effect is more pronounced when local tax competition is taken into account. However, administrative decentralization and supervision decentralization have different effects on enterprises’ environmental innovation. An increase in administrative decentralization has a negative impact on enterprise innovation, and environmental supervision should be more focused on the central government, which can help avoid excessive distortion caused by externalities. Our analysis is of certain reference value for understanding the influence of rational allocation of environmental protection functions among different levels of government on enterprises’ environmental innovation activities.

Spatial Fiscal Interactions in Colombian Municipalities: Evidence from Oil Price Shocks

This study provides an empirical investigation of fiscal interactions in the context of a developing country. I examine three fiscal components—budget balance, tax revenue, and public spending—to measure spatial interactions between Colombian municipalities from 2000 to 2010. I am using variables on municipalities’ general characteristics, fiscal variables, and variables related to the conflict. I use a quasi-experimental identification strategy exploiting exogenous variation from global oil price shocks that affect Colombian municipalities to different degrees depending on local oil endowments. I find significant spatial interaction in taxes but no significant interaction concerning budget balance and total public spending. This suggests that even though there is local tax competition, municipalities do not mimic their neighbors to decide whether to offset tax changes by changes in borrowing or spending.

Fiscal incentives and local tax competition: Evidence from China

AbstractThis paper explores how fiscal incentives affect capital tax decisions by local governments in the Chinese context. We develop a model in which local governments, facing different fiscal incentives, compete for mobile capital over corporate taxes. The key prediction of the model, borne out in data from Chinese cities over the years 2004–13, is that an increase in the local corporate income tax‐sharing ratio, proxying local fiscal incentives, makes city governments’ horizontal tax reactions stronger. Our results contribute to the fiscal federalism literature by providing evidence in support of the argument that fiscal incentives faced by local governments significantly shape their policy choices. Additionally, we provide explicit evidence on local tax competition within provinces in China, which has long been regarded as one of the driving forces of China's rapid economic growth.

Tax Competition with Intermunicipal Cooperation

We study local tax competition when municipalities can voluntarily cooperate with neighboring jurisdictions. In France, the strongest form of cooperation among municipalities occurs by forming an “establishment for inter-municipal cooperation” (EIMC). We study how interjurisdictional policy interdependence differs between competing municipalities within the same EIMC and competing municipalities outside of the cooperative unit. We apply the estimation strategy of Kelejian and Piras (2014) to resolve the endogeneity of the decision to cooperate with other municipalities. We find that strategic interactions among peer members of the same EIMC are less intense than strategic interactions with municipalities outside of the cooperative unit. Our empirical methods can be used to study strategic interactions with other cooperative groups, such as international trade agreements or firm distribution networks.

Tax and the city — A theory of local tax competition

In this paper we propose a novel theoretical model of tax competition at the local level. Large jurisdictions (cities) compete both locally with smaller neighbouring communities and interregionally with more distant cities, while small jurisdictions (hinterlands) compete only with other jurisdictions in their neighbourhood. The model structure is motivated by recent empirical findings as well as survey results among German mayors: the perceived intensity of competition for firms varies considerably between jurisdictions and can mainly be explained by the size and location of the jurisdiction. Our model predicts – contrary to earlier findings for competition between countries or regions – that capital taxes of large jurisdictions fall more strongly with increasing interregional competition and may eventually lead to smaller taxes than in small jurisdictions. Hinterlands are therefore less affected from globalisation than cities. We contrast our results with a standard tax competition model in which all jurisdictions compete with all other jurisdictions.

State and local tax competition in a spatial model with sales taxes and residential property taxes

This paper presents a theoretical model with a uniformly populated line that is divided into local jurisdictions (and/or states). If one level of government imposes sales and residential property taxes, and if the spatial extent of each taxing jurisdiction is positive and finite, then (in Nash equilibrium) the sales tax rate is less than residential property tax rate, housing consumption is suboptimal, and the public good is underprovided in each jurisdiction. If a very large state (or country) is divided into local jurisdictions, and if both levels of government choose tax rates endogenously, then under some assumptions there is an efficient outcome.

Local Tax Competition and Indirect Tax Exportation

This article studies capital tax competition in a model with external ownership of fixed factors. A simple condition is provided on the feasibility of an efficient Nash equilibrium, which depends only on factor income shares, the elasticity of substitution in production, and the size of the public sector. For a reasonable setting and related values, tax exporting incentives are too weak to cancel out the positive externality of tax competition, leading to the conclusion that the most likely outcome is that there will be an undersupply of public activity.

Tax and the City - A Theory of Local Tax Competition and Evidence for Germany

Despite the well-developed empirical literature on local tax competition, little is known about the actual spatial structure of inter-municipal competition. Assuming that competition takes place only among neighbours (as in the empirical literature) is at odds with the theoretical approaches where all jurisdictions compete simultaneously. In this paper we use a survey conducted among mayors in the German state of Baden-Wurttemberg to show that the perceived intensity of competition for firms varies considerably between jurisdictions and can mainly be explained by the size and location of the jurisdiction. Based on these findings, we develop a sequential tax competition model in which urban centres compete with other urban centres and rural jurisdictions in their own neighbourhood. This model predicts that larger jurisdictions do not necessarily rely more on capital taxes; in case they face strong competition with more distant competitors, larger cities even have lower capital taxes. In addition, we discuss how the model compares to a standard simultaneous approach and show that results from our sequential model are in line with trends in local taxation in Baden-Wurttemberg.

Fiscal Externalities in Local Tax Competition: Empirical Evidence from a Panel of German Jurisdictions

This paper is concerned with fiscal externalities arising from local taxation of a mobile factor. Using a panel of more 1100 local jurisdictions it provides empirical evidence on how the local tax rate as well as the tax rate in the neighborhood affect the local tax base. The results support the existence of fiscal externalities: An increase in the tax rate of local neighbors exerts a positive effect on the tax base whereas an increase of the own tax rate has a negative effect, and a joint increase of the tax rate at the local jurisdiction and in its neighborhood has no significant effect on the interjurisdictional distribution of the tax base. However, in the considered case tax competition is alleviated by revenue sharing rules which reduce the jurisdictions' incentive to lower tax rates in order to attract capital.

DECENTRALIZED TAX COMPETITION FOR BUSINESS CAPITAL AND NATIONAL ECONOMIC EFFICIENCY*

ABSTRACT For a nation composed of independent regions, the effects of local tax competition for business investments are examined. It is first shown that atomistic regional authorities tax only local resources to finance the provision of public services to business. Thus, an efficient interregional equilibrium is induced. Various political/institutional constraints are shown to cause misallocation of the capital stock and an inefficient provision of public services. The characterization of the inefficiency is shown to vary widely, depending upon the constraint under consideration.