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Vertical tax competition and consumption externalities in a federation with lobbying

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  • Esteller-Moré, Alejandro
  • Galmarini, Umberto
  • Rizzo, Leonzio

Abstract

We consider a federation with two layers of government, in which Leviathan policy makers levy an excise tax on a consumption good that generates a negative externality and that is produced in an imperfectly competitive market. When both layers of government are allowed to tax, policy choices are affected also by vertical tax competition. In this setting, tax policy in general is not efficient. We then examine how special interest groups may influence tax policy by lobbying the policy makers. We find that, depending on market structure and on the level of the externality, lobbying can improve efficiency, and that tax-base sharing by two layers of government can be more efficient than taxation by a single layer.

Suggested Citation

  • Esteller-Moré, Alejandro & Galmarini, Umberto & Rizzo, Leonzio, 2012. "Vertical tax competition and consumption externalities in a federation with lobbying," Journal of Public Economics, Elsevier, vol. 96(3), pages 295-305.
    • Handle: RePEc:eee:pubeco:v:96:y:2012:i:3:p:295-305
    DOI: 10.1016/j.jpubeco.2011.11.003
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    2. Josip Lesica, 2018. "Lobbying For Minimum Wages," Economic Inquiry, Western Economic Association International, vol. 56(4), pages 2027-2057, October.
    3. Raymond G. Batina & Gregmar I. Galinato, 2017. "The Spillover Effects of Good Governance in a Tax Competition Framework with a Negative Environmental Externality," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(4), pages 701-724, August.
    4. Per G. Fredriksson & Khawaja A. Mamun, 2014. "Tobacco Politics and Electoral Accountability in the United States," Public Finance Review, , vol. 42(1), pages 4-34, January.
    5. Seungjin Han & Siyang Xiong, 2022. "Common Agency with Non-Delegation or Imperfect Commitment," Department of Economics Working Papers 2022-05, McMaster University.
    6. Thomas Aronsson & David Granlund, 2017. "Federal subsidization of state expenditure to reduce political budget cycles," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(3), pages 536-545, June.
    7. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers hal-02939340, HAL.
    8. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working papers of CATT hal-02939399, HAL.
    9. Florence TOUYA, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers 2015-2016_12, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
    10. Diego Martínez-López, 2018. "Vertical Externalities Revisited: New Results with Public Inputs and Unit Taxation," Hacienda Pública Española / Review of Public Economics, IEF, vol. 225(2), pages 11-30, June.
    11. Fabio Antoniou & Panos Hatzipanayotou & Michael S. Michael & Nikos Tsakiris, 2022. "Tax competition in the presence of environmental spillovers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(3), pages 600-626, June.
    12. Alejandro Esteller-Moré & Umberto Galmarini & Leonzio Rizzo, 2017. "Fiscal equalization and lobbying," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(2), pages 221-247, April.
    13. Margaret Frank, Mary & Hoopes, Jeffrey L. & Lester, Rebecca, 2022. "What determines where opportunity knocks? Political affiliation in the selection of Opportunity Zones," Journal of Public Economics, Elsevier, vol. 206(C).
    14. Michele Santoni, 2017. "Protective Excise Taxation," Journal of Industry, Competition and Trade, Springer, vol. 17(4), pages 421-445, December.
    15. Florence TOUYA, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers 2015-2016_11, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
    16. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers hal-02939399, HAL.

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    More about this item

    Keywords

    Vertical tax externalities; Tax assignment; Pressure groups; Excise taxes; Leviathan policy makers;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General

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