The Effects of Expansionary Fiscal Policy on Macroeconomic Development: A Study on Tax Competition in an Emerging Market

Objective: this article examines expansionary fiscal policy in the context of intergovernmental tax competition from a macroeconomic perspective, analyzing the effects of granting tax benefits under the state value-added tax on the circulation of goods and services (ICMS) on the economic development of Santa Catarina, a state in southern Brazil. Methods: monthly data spanning 1997-2020 were analyzed using a vector autoregression (VAR) model with Granger causality tests and impulse-response functions. Results: ICMS shocks temporarily increased the exchange rate and imports but had little or no effect on GDP (proxied by electricity consumption), interest rates, exports, inflation, state revenue, and, most notably, employment. Over the period, industry and import-related activities together received 74% of projected tax incentives, while accounting for only 32% and 11% of formal jobs, respectively. Conclusions: the findings challenge Keynesian expectations of broad-based stimulus and align with neoclassical and public-choice critiques, highlighting the inefficiency, limited employment impact, and rent-seeking nature of such tax policies.