Journal
FINANZARCHIV
Volume 63, Issue 2, Pages 264-277Publisher
MOHR SIEBECK
DOI: 10.1628/001522107X220107
Keywords
tax competition; capital-skill complementarity; public spending; spatial econometrics
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We consider fiscal competition between jurisdictions. Capital taxes are used to finance a public input and two public goods: one that benefits mobile skilled workers and one that benefits immobile unskilled workers. We derive the jurisdictions' reaction functions for different spending categories. We then estimate these reaction functions using data from German communities. Thereby we explicitly allow for a spatially lagged dependent variable and a possible spatial error dependence by applying a generalized spatial two-stage least-squares (GS2SLS) procedure. The results show that there is significant interaction between spending of neighboring counties in Germany.
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