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Abstract for:

Tax Competition Among Local Governments: Evidence from a Property Tax Reform in Finland

Teemu  Lyytikäinen,  June 2011
Paper No' SERCDP0082: | Full paper (pdf)
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Keywords: Property tax; tax competition, fiscal interaction, instrumental variables, spatial econometrics

JEL Classification: H20; H71; H77

Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: SERC Discussion Papers
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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.