Tax auditing interdependence among sub-central administrations

The tax administration parameters have scarcely been analyzed by the literature as relevant policymaking instruments; however the enforcement strategies are crucial elements of the tax management. In this paper we show that in a federal framework the tax auditing policies could represent additional tools on which regional institutions can interact between them. We develop a horizontal tax competition model with two tax instruments: the tax rate and the tax auditing rate in order to empirically test its findings. For what concern the tax auditing rate, the results are in line with the literature on tax rate competition: the Leviathan administrations compete in a race to the bottom in order to not lose the tax bases. In particular we find that the slope of the administration�s reaction function is positive. The empirical analysis starts with a study of the determinants of the tax administration. A suboptimal size of tax administration emerges. Some of the budgetary variables have a good explicative power but don�t represent the main effect at work. For this reason we formally introduce the tax competition. Testing for spatial interactions corroborates the horizontal tax competition hypothesis provided by the theoretical model. Controlling for horizontal tax competition the size of tax administration is optimal: the regional administrations are tamed by the mobility based competition