Public economics

Business

State income tax

Value-added tax

Indirect tax

Strategic complements

Econometrics

Economics

Microeconomics

Tax competition

Tax rate

Ad valorem tax

Monetary economics

Tax reform

Endogeneity

American Economic Journal Economic Policy

The identification of strategic interactions among local governments is typically plagued by endogeneity problems. I exploit the fact that local jurisdictions located close to a state border have some neighbors in another state and instrument the tax rate of neighbor jurisdictions with the state-level tax rate of the neighboring state. I use this instrument to identify strategic personal income tax setting by local jurisdictions in Switzerland and find that tax rates are strategic substitutes. I then develop a residence-based personal income tax competition model and show that tax rates are strategic substitutes if the elasticity of the marginal utility of the public good with respect to the tax rate is above one. This is notably the case in the presence of economies of scale in the public good provision. (JEL H24, H71, H73, H77)

Are Local Tax Rates Strategic Complements or Strategic Substitutes?