Skip to main content
SpringerLink
Log in

Strategic fiscal interaction among OECD countries

  • Published:
Public Choice Aims and scope Submit manuscript

Abstract

This paper investigates whether OECD countries compete with each other for mobile factors by using various fiscal (tax-spending) policy instruments. We use a panel dataset of 20 OECD countries over the 1982–2000 period. Results reveal evidence that international capital inflows (FDI) are affected by fiscal policy at home and abroad. Also, there is evidence that domestic capital tax rates react: (i) positively to changes in capital tax rates in neighboring countries, and (ii) negatively to changes in public investment spending in neighboring countries. In contrast, strategic interdependence over public investment spending decisions is not established.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Adam, A., & Filippaios, F. (2007). Foreign direct investment and civil liberties: a new perspective. European Journal of Political Economy, 23, 1038–1052.

    Article  Google Scholar 

  • Adam, A., & Kammas, P. (2007). Tax policies in a globalized world: is it politics after all? Public Choice, 133, 321–341.

    Article  Google Scholar 

  • Alesina, A., & Glaeser, E. (2004). Fighting poverty in the US and Europe. New York: Oxford University Press.

    Book  Google Scholar 

  • Baicker, K. (2005). The spillover effect of state spending. Journal of Public Economics, 89, 529–544.

    Article  Google Scholar 

  • Bayindir-Upmann, T. (1998). Two games of interjurisdictional competition when local governments provide industrial public goods. International Tax and Public Finance, 5, 471–487.

    Article  Google Scholar 

  • Bénassy-Quéré, A., Fontagné, L., & Lahrèche-Révil, A. (2005a). How does FDI react to corporate taxation? International Tax and Public Finance, 12, 583–603.

    Article  Google Scholar 

  • Bénassy-Quéré, A., Golbaraja, N., & Trannoy, A. (2005b). Tax competition and public input (Working Paper No. 40). European Network of Economic Policy Research Institutes.

  • Bertrand, M., Duflo, E., & Mullainathan, S. (2004). How much should we trust differences-in-differences estimates? Quarterly Journal of Economics, 119, 249–275.

    Article  Google Scholar 

  • Besley, T., & Case, A. (1995). Incumbent behavior: vote seeking, tax setting and yardstick competition. American Economic Review, 85, 25–45.

    Google Scholar 

  • Besley, T., Griffith, R., & Klemm, A. (2001). Empirical evidence on fiscal interdependence in OECD countries (Mimeo).

  • Bleaney, M., Gemmell, N., & Kneller, R. (2001). Testing the endogenous growth model: public expenditure, taxation and growth over the long run. Canadian Journal of Economics, 34, 36–57.

    Article  Google Scholar 

  • Brett, C., & Pinkse, J. (1997). Those taxes are all over the map: a test for spatial dependence of municipal tax rates in British Columbia. International Regional Science Review, 20, 131–151.

    Article  Google Scholar 

  • Brett, C., & Pinkse, J. (2000). The determinants of municipal tax rates in British Columbia. Canadian Journal of Economics, 33, 695–714.

    Article  Google Scholar 

  • Brueckner, J. (2003). Strategic interaction among governments: an overview of the empirical studies. International Regional Science Review, 26, 175–188.

    Article  Google Scholar 

  • Brueckner, J., & Saavedra, L. (2001). Do local governments engage in strategic property tax competition? National Tax Journal, 54, 203–229.

    Google Scholar 

  • Buettner, T. (2001). Local business taxation and competition for capital: the choice of the tax rate. Regional Science and Urban Economics, 31, 215–245.

    Article  Google Scholar 

  • Case, A., Hines, J., & Rosen, H. (1993). Budget spillovers and fiscal policy interdependence. Journal of Public Economics, 52, 285–307.

    Article  Google Scholar 

  • Cassette, A., & Paty, S. (2008). Tax competition among Eastern and Western European countries: with whom do countries compete? Economic Systems, 32, 307–325.

    Article  Google Scholar 

  • CEPII (2004). Geodesic Distances Dataset. http://www.cepii.fr/anglaisgraph/bdd/distances.htm.

  • Cusack, T. (1997). Partisan politics and public finance: changes in public spending in the industrialized democracies, 1955–1998. Public Choice, 91, 375–395.

    Article  Google Scholar 

  • de Mooij, R., & Ederveen, S. (2003). Taxation and foreign direct investment: a synthesis of empirical research. International Tax and Public Finance, 10, 673–693.

    Article  Google Scholar 

  • Devereux, M., & Griffith, R. (1998). Taxes and the location of production: evidence from a panel of US multinationals. Journal of Public Economics, 68, 335–367.

    Article  Google Scholar 

  • Devereux, M., Griffith, R., & Klemm, A. (2002). Corporate income tax reforms and international tax competition. Economic Policy, 35, 451–495.

    Google Scholar 

  • Devereux, M., Lockwood, B., & Redoano, M. (2006). Horizontal and vertical indirect tax competition: theory and some evidence from the USA. Journal of Public Economics, 91, 451–479.

    Article  Google Scholar 

  • Devereux, M., Lockwood, B., & Redoano, M. (2008). Do countries compete over corporate tax rates? Journal of Public Economics, 92, 1210–1235.

    Google Scholar 

  • Easterly, W., & Levine, R. (1997). Africa’s growth tragedy: policies and ethnic divisions. Quarterly Journal of Economics, 111, 1203–1250.

    Article  Google Scholar 

  • Fuest, C. (1995). Interjurisdictional competition and public expenditure: is tax coordination counterproductive? Finanzarchiv, 52, 478–496.

    Google Scholar 

  • Haufler, A. (2001). Taxation in a global economy. Cambridge: Cambridge University Press.

    Google Scholar 

  • Hayashi, M., & Boadway, R. (2001). An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada. Canadian Journal of Economics, 34, 481–503.

    Article  Google Scholar 

  • International Country Risk Guide (2006). IRIS Center, University of Maryland.

  • Karkalakos, S., & Kotsogiannis, C. (2007). A spatial analysis of provincial corporate income tax responses: evidence from Canada. Canadian Journal of Economics, 40, 782–811.

    Article  Google Scholar 

  • Keen, M., & Marchand, M. (1997). Fiscal competition and the pattern of public spending. Journal of Public Economics, 66, 33–53.

    Article  Google Scholar 

  • Kelejian, H., & Prucha, I. (1998). A generalized spatial two-stage least squares procedure for estimating a spatial autoregressive model with autoregressive disturbances. Journal of Real Estate Finance and Economics, 17, 99–121.

    Article  Google Scholar 

  • Kneller, R., Bleaney, M., & Gemmel, N. (1999). Fiscal policy and growth: evidence from OECD countries. Journal of Public Economics, 74, 171–190.

    Article  Google Scholar 

  • Mendoza, E., Razin, A., & Tesar, L. (1994). Effective tax rates in macroeconomics: cross-country estimates of tax rates on factor income and consumption. Journal of Monetary Economics, 34, 447–461.

    Article  Google Scholar 

  • Oates, W. E. (1972). Fiscal federalism. New York: Harcourt Brace.

    Google Scholar 

  • OECD (2005a). Economic outlook: annual and quarterly data (Vol. 2005, release 01).

  • OECD (2005b). National accounts statistics: annual data main aggregates (Vol. 2005).

  • Persson, T., & Tabellini, G. (1992). The politics of 1992: fiscal policy and European integration. Review of Economic Studies, 59, 689–701.

    Article  Google Scholar 

  • Pitlik, H. (2007). A race to liberalization? Diffusion of economic policy reform among OECD economies. Public Choice, 132, 159–178.

    Article  Google Scholar 

  • Redoano, M. (2007). Fiscal interaction among European countries. Does the EU matter? (Working paper no. 1952). CESifo, Munich.

  • Rodrik, D. (1998). Why do more open economies have bigger governments? The Journal of Political Economy, 106, 997–1032.

    Article  Google Scholar 

  • Salmon, P. (1987). Decentralization as an incentive scheme. Oxford Review of Economic Policy, 3, 24–43.

    Article  Google Scholar 

  • Shleifer, A. (1985). A theory of yardstick competition. Rand Journal of Economics, 16, 319–327.

    Article  Google Scholar 

  • Tavares, J. (2004). Does right or left matter? Cabinets, credibility and fiscal adjustments. Journal of Public Economics, 88, 2447–2468.

    Article  Google Scholar 

  • Volkerink, B., & de Haan, J. (2001a). Tax ratios: a critical survey. OECD Tax Policy Studies, 1–80.

  • Volkerink, B., & de Haan, J. (2001b). Fragmented government effects on fiscal policy: new evidence. Public Choice, 109, 221–242.

    Article  Google Scholar 

  • Wildasin, D. (1988). Nash equilibria in models of fiscal competition. Journal of Public Economics, 35, 229–240.

    Article  Google Scholar 

  • Wilson, J. (1986). A theory of interregional tax competition. Journal of Urban Economics, 19, 296–315.

    Article  Google Scholar 

  • Wilson, J. (1999). Theories of tax competition. National Tax Journal, 52, 269–304.

    Google Scholar 

  • Wilson, J., & Wildasin, D. (2004). Tax competition: bane or boon. Journal of Public Economics, 88, 1065–1091.

    Article  Google Scholar 

  • World Bank (2004). World Bank Development Indicators, CD-ROM, Washington: World Bank.

  • Zodrow, G., & Mieszkowski, P. (1986). Pigou, Tiebout, property taxation, and the underprovision of local public goods. Journal of Urban Economics, 19, 356–370.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Ioannina, Ioannina, Greece

    Pantelis Kammas

Authors
  1. Pantelis Kammas
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Pantelis Kammas.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Kammas, P. Strategic fiscal interaction among OECD countries. Public Choice 147, 459–480 (2011). https://doi.org/10.1007/s11127-010-9641-6

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11127-010-9641-6

Keywords

JEL Classification

Search

Navigation