Tax Interaction Dynamics Among Belgian Municipalities 1984-1997

Abstract

The purpose of this paper is test econometrically the existence of fiscal interactions between Belgian municipalities. At the time of writing, the motivation was to provide scientific support to the lively debate on fiscal competition that took place among Belgian politicians in the late nineties. Two types of taxes are considered, for which Belgian municipalities have the decision power as to rates: the "centimes additionnels" on the personal income tax and the "precompte immobilier" which is a property tax. A dynamic adjusstment model is specified and estimated using panel data for 598 municipalities over 15 years. The empirical results obtained bear upon two main points: (1) Some interaction definitely has prevailed between the municipalities' fiscal choices made during the observation period, for both taxes; (2) However, the adjustment reactions to the other municipalities' fiscal choices have occurred over time at the very low yearly pace of 6% and 10%, respectively, of the discrepancy between the actual rates and the preferred rates.