Regional Tax Competition: Evidence from French Regions

Abstract

Two mechanisms can lead to fiscal strategic interactions between local jurisdictions. The first one is due to the tax base mobility. Authorities use fiscal variables to attract new resources. The second one is related to information asymmetries between the politicians and the constituency. To reduce these asymmetries, voters can compare their fiscal situation to the one in neighboring jurisdictions. These two channels lead to what we can refer to as "mobility-led" and "information-led" tax competition. This paper aims at discriminating among these two tax competition models in the case of the French regions. The econometric tests suggest that when taxes are paid by voters the politicians in office seem to be involved in an "information-led" tax competition, while in the case of taxes paid by firms, the mobility of the tax base seems to be the best way to explain strategic fiscal interactions.