The Effects of Tax Competition on Consumption Taxation, Corporate Investment, and Property Taxes

Abstract

This dissertation investigates questions of the taxation of mobile versus immobile tax bases with a particular focus on (effective) corporate, consumption, and property tax rates. It consists of three self-contained chapters dealing with the effects of international tax competition on con-sumption taxation, the heterogeneous investment effects of effective corporate tax rates, and the spatial dimension of tax policy spillovers in German municipalities. Chapter 1 empirically investi-gates whether governments are substituting from corporate to consumption taxation due to tax competition using a novel self-collected data set of corporate and consumption tax regime infor-mation. I estimate the slope of the tax policy reaction function between corporate and consump-tion tax rates exploiting the cross-sectional interdependence of corporate tax rates for an instru-mental variable approach. Additionally, I analyze the rate-revenue relationship of both tax instru-ments to evaluate the overall revenue implications of corporate tax competition. I find that, on average, a one percentage point decrease in the corporate tax rate leads to a [0.35] percentage point increase in the consumption tax rate. The rate-revenue relationship of both corporate and consumption tax rates follows an inverted U-shape. Furthermore, governments can fully compen-sate for revenue losses from tax competition by substituting to consumption taxation. These re-sults indicate that the debate on corporate tax competition may overstate efficiency considera-tions and underestimate equity concerns. Chapter 2 develops a new approach to calculate coun-try-year-industry-specific forward-looking effective tax rates (FLETRs) based on a panel of 19 industries, 221 countries, and the years 2001 to 2020. Beside statutory tax rate and tax base in-formation, the FLETRs account for firms’ typical (i.e., industry specific) financing structures as well as asset compositions. We show that effective tax rates suffer from significant measurement error when the latter information is neglected, owing primarily to inappropriately assigned asset weights to statutory depreciation allowances. Our empirical analysis exploits the substantial var-iation in FLETRs over time to provide estimates of the tax semi-elasticity of corporate investment in tangible fixed assets. Based on [more than 24 million] firm-entity observations, our results sug-gest a semi-tax-elasticity of [-0.45], which is at the lower end of previous findings. We further show that different subgroups of firms respond very heterogeneously to tax incentives. For exam-ple, when focusing on firm-entities operating in the manufacturing sector, we find a substantially bigger semi-elasticity of [-1.29]. Chapter 3 studies tax policy interaction for both mobile and im-mobile tax bases using a large panel of German municipalities. We exploit a quasi-exogenous increase in local tax instruments from state debt reduction programs in Hesse and Northrhine-Westfalia to identify if governments engage in tax or yardstick competition. Additionally, we also analyze the spatial persistence of any spillovers. We find evidence that municipalities located in the same state but not directly affected by the debt reduction program show strong and significant tax policy responses both in corporate and property tax rates. Furthermore, the policy spillovers from property tax rates are highly localized indicating that municipalities engage in yardstick competition.