Tax reaction function estimation in multi-level fiscal structures: an application to Italy

This paper estimates a spatial dynamic panel model on data from the Italian multi-tiered structure of personal income taxation, using distance of lower-tier (municipal) units’ neighbors from upper-tier (regional) internal borders interacted with policy variables across those borders as instruments for neighbors’ endogenous policy variables. The empirical evidence reveals the existence of an intermunicipal spatial interaction process that is most likely due to information spillovers and points to the role of tax discontinuities at regional borders in the identification of intermunicipal fiscal competition.