OECD Economics Department Working Papers
Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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- Forthcoming titles
- ISSN: 18151973 (online)
- https://doi.org/10.1787/18151973
The Brazilian 'Tax War'
The Case of Value-Added Tax Competition among the States
This paper tests for horizontal tax competition in the VAT for a sample of Brazilian states in the period
1985-2001. The states have considerable autonomy to set their VAT rates and bases, often using this tax as
an industrial policy tool. The empirical findings, based on the estimation of a tax reaction function in an
error-correction set-up, confirm the hypothesis of horizontal tax competition: the states react strongly to
changes in their neighbours? VAT code, especially those that belong to the same geo-economic region.
Also, there appears to be a Stackelberg leader among the states, with the remaining jurisdictions
responding strongly to its policy moves. There is no co-occupancy of tax bases between different levels of
government and hence limited scope for vertical externalities in tax setting. But the fact that the federal
government shares with the states part of the revenue of its more elastic taxes, such as the income tax,
appears to affect the opportunity cost of horizontal tax competition.
Keywords: tax reaction function, Nash, ICMS, fiscal federalism, Brazil, Stackelberg
JEL:
H2: Public Economics / Taxation, Subsidies, and Revenue;
H7: Public Economics / State and Local Government; Intergovernmental Relations
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