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Tax Competition, Tax Policy, and Innovation DISSERTATION

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Tax Competition, Tax Policy, and Innovation DISSERTATION Tax competition, Tax policy, and Innovation DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Yuan Wang, M.A. Graduate Program in Economics The Ohio State University 2017 Dissertation Committee: Pok-Sang Lam, Advisor Lucia Dunn Stephen Cosslett Copyrighted by Yuan Wang 2017 Abstract My research concerns how governments make economic decisions and interact with other governments, to increase social welfare; in particular, my focus lies in the area of taxation and technological innovation. In a globalized economy with mobile capital, increasing interest has been paid to capital tax policy. My research is among the first to examine empirically and explain theoretically the tax competition among states in the U.S. Moreover, I also study how state governments set their tax rates using historical data and explain why the pattern observed is different from the zero-tax theory. Due to the absence of state-level average capital tax rate data, I first construct a panel dataset of average capital income tax rates at the state level for the period 1958-2007 for the capital taxation studies. In Chapter 1, I analyze the tax policy of each individual state government. Empirical evidence implies that tax rates are history-dependent. I provide an alternative explanation for nonzero capital tax rate, reexamining Ramsey's (1927) rule. With a lack of commitment power from government, households form adaptive expectations on capital tax rates. The equilibrium capital tax rate is thus history-dependent with a balanced- budget requirement on state governments. The investment decision combines income and substitution effects, and the U.S. states differ on investment sensitivity to capital tax ii rates. I provide empirical findings on investment sensitivity for each state, and then a structural model is applied to replicate the empirical. In Chapter 2, I analyze the pattern of strategic interaction on capital tax rates among states in the U.S. This paper is the first to apply MLE estimation of the SAR panel data model with fixed-effects to study tax competition behavior. Through a joint investigation into both tax competition behavior and capital allocation decision, I demonstrate the existence of capital tax competition among states in the South and West, but competition is less significant in the Midwest and Northeast. I then apply a high-order SAR panel data estimation with fixed-effects to study the impact of population growth on tax competition, and results suggest that faster population growth significantly relates to stronger reaction to changes in neighbors' tax policy. I also apply two weighting schemes of neighbors to validate the findings. A two-period structural model with a saving decision is developed to explain this result. The model features a capital dilution effect which is also tested empirically. In Chapter 3, a quality ladder model is developed in which the technology gap between the North and the South is endogenously determined. A stronger intellectual property rights (IPR) in the South discourages imitation and reduces the FDI cycle length. The optimal IPR strength balances two effects, long-run and short-run effects, and it is non- monotonic in the market size and increasing in the number of imitating firms. The social welfare of the South is decreasing in the FDI cycle length, but is decreasing in IPR strength given cycle length. iii Acknowledgments I would like to express my sincere gratitude to my advisor Prof. Pok-Sang Lam for his great help and persistent support during my Ph.D. study, and for his encouragement, guidance and care. I would like to express the deepest appreciation to my committee members Prof. Lucia Dunn and Prof. Stephen Cosslett, for their insightful feedbacks, encouraging comments, great patience and support. In addition, I would like to thank Prof. Paul Evans, who helped me to start my research in my Ph.D. study, with his immense knowledge and motivating advice. iv Vita 2007................................................................NanKai High School 2011................................................................B.S. Economics, Chinese University of Hong Kong 2012................................................................M.A. Economics, The Ohio State University 2013 to present ..............................................Graduate Teaching Associate, Department of Economics, The Ohio State University Fields of Study Major Field: Economics v Table of Contents Abstract ............................................................................................................................... ii Acknowledgments.............................................................................................................. iv Vita ...................................................................................................................................... v List of Tables ................................................................................................................... viii List of Figures .................................................................................................................... xi Chapter 1: History-Dependent Capital Taxation ................................................................ 1 Chapter 2: Tax Competition with Population Growth ...................................................... 41 Chapter 3: Foreign Direct Investment Cycles and Intellectual Property Rights in Developing Countries ....................................................................................................... 93 References ....................................................................................................................... 134 Appendix A: Initial Belief .............................................................................................. 140 Appendix B: Sensitivity Pattern...................................................................................... 141 Appendix C: Tests for Equality of Means between Series: Gini Coefficient ................. 142 Appendix D: State Abbreviations of the major four areas in the U.S. ............................ 143 Appendix E: Variables .................................................................................................... 144 vi Appendix F: Instrumental Variables ............................................................................... 150 Appendix G: Capital allocation regression ..................................................................... 151 Appendix H: Proofs ........................................................................................................ 156 vii List of Tables Table 1. Tax Sensitivity Estimation of Representative States .......................................... 10 Table 2. Fixed-Effect Test for Multiple Equilibria ........................................................... 25 Table 3: Weighting Schemes of SAR Panel Estimation ................................................... 48 Table 4: Abbreviations of variables .................................................................................. 50 Table 5: Tax competition regressions ............................................................................... 52 Table 6: Tax competition regressions, SAR Panel with spatial fixed effect South 1 ....... 54 Table 7: Tax competition regressions, SAR Panel with spatial fixed effect South 2 ....... 55 Table 8: Tax competition regressions, SAR Panel with spatial fxed effect Midwest 1.... 56 Table 9: Tax competition regressions, SAR Panel with spatial fixed effect Midwest 2 .. 57 Table 10: Tax competition regressions, SAR Panel with spatial fixed effect West 1 ...... 58 Table 11: Tax competition regressions, SAR Panel with spatial fixed effect West 2 ...... 59 Table 12: Tax competition regressions, SAR Panel with spatial fixed effect Northeast-160 Table 13: Tax competition regressions, SAR Panel with spatial fixed effect Northeast-261 Table 14: Tax competition regressions, high-order SAR Panel with spatial fixed effect Scheme 1 ........................................................................................................................... 64 Table 15: Tax competition regressions, high-order SAR Panel with spatial fixed effect Scheme 2 ........................................................................................................................... 65 Table 16: Capital Allocation Regression .......................................................................... 69 viii Table 17: Tax competition regressions, SAR Panel with spatial fixed effect-contiguous equal .................................................................................................................................. 73 Table 18: Tax competition regressions, SAR Panel with spatial fixed effect-industrial equal .................................................................................................................................. 75 Table 19: Tax competition regressions, SAR Panel with spatial fixed effect-industrial distance weighted .............................................................................................................. 77 Table 20: Tax competition regressions, SAR Panel with spatial fixed effect-contiguous industrial equal .................................................................................................................. 79 Table 21: Initial Belief ...................................................................................................
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