DO GOVERNMENTS ENGAGE IN STRATEGIC PROPERTY-TAX COMPETITION?

DO GOVERNMENTS ENGAGE IN STRATEGIC PROPERTY-TAX COMPETITION?

J.K. Brueckney & L.A. Saavedra, National Tax Journal Vol 56, No. 2

A Brief Summary 

In a Nutshell

The authors use city level data from the US to estimate a model of strategic-tax competition and specifically the tax reaction function. They find that this function has a non-zero slope which indicates changes in a local competitor’s rates affects choices made by a different community.

The data are drawn from a sample of 70 cities that comprise the Boston Metropolitan area. Working under the assumption that community The authors use city level data from the US to estimate a model of strategic-tax competition and specifically the tax reaction function. They find that this function has a non-zero slope which indicates changes in a local competitor’s rates affects choices made by a different community.

The data are drawn from a sample of 70 cities that comprise the Boston Metropolitan area. Working under the assumption that community i‘s tax decision is a function of the tax rates in other communities they use a SAR model of weighted averages of neighbouring jurisdictions as a spatial lag. To check their results are not driven by the weighting scheme used (as it is arbitrary), they test different weighting schemes as part of their robustness checks (contiguous neighbour, distance decay, population weighting, and combinations thereof).

They are aware of the simultaneity problem and the bias that would introduce using OLS, so their estimations are made using Max Likelihood.

The principal finding was that the coefficient on the spatial lag was positive and significant, and this was robust to the different weighting measures. This implies that for the period, strategic tax rate setting occurred and the best response of a community who was faced with increased rates in a neighbouring community, was to themselves raise rates. In game theory this means that communities are strategic compliments.

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