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How Socialization Attenuates Tax Competition

Abstract

Tax competition is the quintessential example of policy interdependence. The general idea is that tax changes in one jurisdiction lead to similar changes in others. However, research has shown that institutional and political constraints limit competition. This article develops another argument: that socialization among policy makers attenuates competitive dynamics by setting limits to the extent of competition that is considered acceptable. Using fine-grained Swiss data and spatial econometric techniques, it shows that personal income tax rates are more strongly correlated among competitors that do not participate in the same intergovernmental organizations. This finding implies that, to some extent, the detrimental consequences of competition can be mitigated by fostering institutionalized forms of interaction among policy makers.

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Department of Political Science, University of Zurich, Switzerland (emails: gilardi@ipz.uzh.ch; wasserfallen@ipz.uzh.ch). The authors are listed in alphabetical order, as they contributed equally. We thank Dietmar Braun, Christian Breunig, Dominik Hangartner, Jude Hays, Lucas Leemann, Charles Shipan, Peter Starke, David Andrew Singer, Vera Troeger, Oliver Westerwinter and several anonymous reviewers for their valuable feedback. We also thank the BJPolS editor, Hugh Ward, for insightful suggestions and helpful guidance during the review process, and Gema Ricart (Swiss Federal Tax Administration), Andreas Huber-Schlatter and Peter Mischler (Secretariat of the Conference of Finance Ministers) for their help with data collection. Data replication sets and online appendices are available at http://dx.doi.org/10.1017/S0007123414000246.

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