Hendrik Vrijburg

Enhanced Cooperation in an Asymmetric Model of Tax Competition

This paper analyzes enhanced cooperation agreements in corporate taxation in a three country tax competition model where countries differ in size. We characterize equilibrium tax rates and the optimal tax responses due to the formation of an enhanced cooperation agreement. Conditions for strategic complementarity or strategic substitutability of tax rates are crucial for the welfare effects of enhanced cooperation. Simulations show that enhanced cooperation is unlikely to be feasible for small countries. When enhanced cooperation is feasible, it may hamper global harmonization. Only when countries are of similar size is global harmonization a feasible outcome.

Dynamic Panel Data Models Featuring Endogenous Interaction and Spatially Correlated Errors

We extend the three-step generalized methods of moments (GMM) approach of Kapoor, Kelejian, and Prucha (2007), which corrects for spatially correlated errors in static panel data models, by introducing a spatial lag and a one-period lag of the dependent variable as additional explanatory variables. Combining the extended Kapoor, Kelejian, and Prucha (2007) approach with the dynamic panel data model GMM estimators of Arellano and Bond (1991) and Blundell and Bond (1998) and supplementing the dynamic instruments by lagged and weighted exogenous variables as suggested by Kelejian and Robinson (1993) yields new spatial dynamic panel data estimators. The performance of these spatial dynamic panel data estimators is in- vestigated by means of Monte Carlo simulations. We show that differences in bias as well as root mean squared error between spatial GMM estimates and corresponding GMM estimates in which spatial error correlation is ignored are small.

Tax Rates as Strategic Substitutes

This paper analytically derives the conditions under which the slope of the tax reaction function is negative in a classical tax competition model. If countries maximize welfare, we show that a negative slope (reflecting strategic substitutability) occurs under relatively mild conditions. Simulations suggest that strategic substitutability occurs under plausible parameter configurations. The strategic tax response is crucial for understanding tax competition games, as well as for assessing the welfare effects of partial tax unions (whereby a subset of countries coordinate their tax rates). Indeed, contrary to earlier findings that have assumed strategic complementarity in tax rates, we show that partial tax unions might reduce welfare under strategic substitutability.

GMM Estimation of Fixed Effects Dynamic Panel Data Models with Spatial Lag and Spatial Errors

We extend the three-step generalized methods of moments (GMM) approach of Kapoor et al. (2007), which corrects for spatially correlated errors in static panel data models, by introducing a spatial lag and a one-period lag of the dependent variable as additional explanatory variables. Combining the extended Kapoor et al. (2007) approach with the dynamic panel data model GMM estimators of Arellano and Bond (1991) and Blundell and Bond (1998) and specifying moment conditions for various time lags, spatial lags, and sets of exogenous variables yields new spatial dynamic panel data estimators. We prove their consistency and asymptotic normality for a large number of spatial units N and a xed small number of time periods T. Monte Carlo simulations demonstrate that the root mean squared error of spatially corrected GMM estimates|which are based on a spatial lag and spatial error correction|is generally smaller than that of corresponding spatial GMM estimates in which spatial error correlation is ignored. We show that the spatial Blundell-Bond estimators outperform the spatial Arellano-Bond estimators.

The Effect of 'Excessive' Tax Planning and Tax Setting on Welfare: Action Needed?

This article presents a literature review on the welfare effects of excessive company taxation practices. The article intends to structure the debate by sketching a conceptual framework of thought for the topic under consideration and places the existing literature within this framework. The article ends with a thought-provoking discussion between two extreme papers in the literature, one against tax planning and one in favour. The discussion is concluded by identifying the fundamental differences in assumptions underlying both approaches.