Public expenditure spillovers: an explanation for heterogeneous tax reaction functions

In this article, we show that spillovers may provide an alternative explanation for the heterogeneity of tax reaction functions under tax competition. In particular, we assume the existence of n ≥ 2 jurisdictions, which compete to attract mobile capital in a context where public expenditure produces...

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Bibliographic Details
Published inInternational tax and public finance Vol. 28; no. 3; pp. 497 - 514
Main Authors Levaggi, Rosella, Panteghini, Paolo M.
Format Journal Article
LanguageEnglish
Published New York Springer US 01.06.2021
Springer Nature B.V
Subjects
Business Taxation/Tax Law
Economics
Economics and Finance
Expenditures
Government spending
Heterogeneity
International taxation
Jurisdiction
Public Finance
Tax rates
Taxation
Asymmetric reaction Functions
Spillovers
H25
H2
H4
Tax competition
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Summary:In this article, we show that spillovers may provide an alternative explanation for the heterogeneity of tax reaction functions under tax competition. In particular, we assume the existence of n ≥ 2 jurisdictions, which compete to attract mobile capital in a context where public expenditure produces spillovers. We show that the latter can lead to asymmetric responses. For instance, jurisdiction i may react positively to a change in the tax rate of jurisdiction j and negatively to the change in jurisdiction z . From a policy point of view, these findings are helpful to understand the mixed results found by the empirical literature, and to analyse the tax reaction functions of city centres and suburban jurisdictions.
ISSN:0927-5940
1573-6970
DOI:10.1007/s10797-020-09620-7