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I like the way you move: tax competition in Portuguese Municipal corporate income tax
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Resumo(s)
We study tax competition in municipal corporate income tax using a di erence-indi
erences approach based on the fact that municipalities with a left-wing mayor set
consistently higher tax rates than those with a right-wing mayor. We use a panel of
278 Portuguese mainland municipalities, between 1998 and 2013. We show that leftrun
municipalities with a common border with one or more right-run municipalities (the
treatment group) set lower tax rates than the remaining left-run municipalities (the control
group). We also show that this lower tax rate does not result from a smaller left-leaning
preference of the voters of treated municipalities. We build on this di erence-in-di erences
approach to provide an instrumental variables estimation of the municipal tax reaction
functions. Our preferred estimate suggests that municipalities react to an average increase
of 1 pp of the neighbours' tax rate with an own tax increase of 0.884 pp. We show that the
strategic interaction is invariant to the political strength of the incumbent mayor, which
we take as evidence that tax, rather than yardstick competition, is driving our results.
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Tax competition Local taxation Corporate income tax Portugal JEL classifcation: D72, H71, H73