CAN LOWER TAX RATES BE BOUGHT? BUSINESS RENT-SEEKING AND TAX COMPETITION AMONG U.S. STATES

Abstract

The standard model of strategic tax competition assumes that government policymakers are perfectly benevolent. We depart from this assumption by allowing for the possibility that policymakers are influenced by the rent-seeking (lobbying) behavior of businesses. This extension implies that business campaign contributions may affect not only the levels of equilibrium tax rates, but also the slope of the tax reaction function between jurisdictions, thus enhancing or retarding capital mobility. With panel data for 48 U.S. states and unique data on business campaign contributions, we document, among other results, a significant direct effect of contributions on tax policy; the economic value of a $1 contribution in terms of lower state corporate taxes is approximately $6.65.