Follow the Leader? Evidence on European and US Tax Competition

Abstract

This article breaks from the previous empirical literature that estimates Nash tax reaction functions of national governments competing with other national governments assuming that competitors play a Nash game and adjust to a Nash equilibrium in every year. We question this assumption and explore whether one country plays a leadership role in tax competition using data from 1968 to 2008. We test the leadership role of the United States, the United Kingdom, and Germany, and find support for a US leadership role. We also investigate whether countries react differently immediately after watershed tax reforms such as the 1986 US Tax Reform Act or the 1984 UK tax reform. We find some support for a different reaction to the United States following the 1986 US reform, but not for the United Kingdom or Germany.