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Vertical Tax Competition with Tax Sharing and Equalization Grants

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Author Info
Lisa Grazzini () (University of Florence)
Alessandro Petretto () (University of Florence)

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Abstract

The aim of this paper is to analyse how vertical fiscal externalities affect local tax policies within a federal country. According to the theoretical literature on fiscal federalism, the direction of this impact is ambiguous, although a complementarity between the two tax policies, federal and local, tends to prevail. Our main result shows instead that, with a more general system of financing local public expenditure, federal and local policies tend more easily to be strategic substitutes. Such a result is obtained within a federation where local public expenditures are financed through three different tax instruments: a surtax on the local fiscal base, a revenue sharing, and an equalization grant. This financing system is rather general and in some sense similar to that provided by the recently reformed Italian Constitution.

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Publisher Info
Article provided by GDE (Giornale degli Economisti e Annali di Economia), Bocconi University in its journal Giornale degli Economisti e Annali di Economia.

Volume (Year): 65 (2006)
Issue (Month): 1 (May)
Pages: 75-94
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Handle: RePEc:gde:journl:gde_v65_n1_p75-94

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Related research
Keywords: fiscal federalism; fiscal externality; vertical tax competition;

Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May. [Downloadable!] (restricted)
  2. Linda Andersson & Thomas Aronsson & Magnus Wikström, 2004. "Testing for Vertical Fiscal Externalities," Asia-Pacific Financial Markets, Springer, vol. 11(3), pages 243-263, May. [Downloadable!] (restricted)
    Other versions:
  3. Charles Figuieres & Jean Hindriks & Gareth Myles, 2004. "Revenue Sharing versus Expenditure Sharing in a Federal System," Asia-Pacific Financial Markets, Springer, vol. 11(2), pages 155-174, March. [Downloadable!] (restricted)
    Other versions:
  4. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
  5. Michael Keen & Christos Kotsogiannis, 2003. "Leviathan and Capital Tax Competition in Federations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 177-199, 04. [Downloadable!] (restricted)
  6. Alejandro Esteller-Moré & Albert Solé-Ollé, 2002. "Tax Setting in a Federal System: The Case of Personal Income Taxation in Canada," International Tax and Public Finance, Springer, vol. 9(3), pages 235-257, May. [Downloadable!] (restricted)
    Other versions:
  7. Gordon, Roger H, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 567-86, November. [Downloadable!] (restricted)
    Other versions:
  8. Goodspeed, Timothy J., 2002. "Tax competition and tax structure in open federal economies: Evidence from OECD countries with implications for the European Union," European Economic Review, Elsevier, vol. 46(2), pages 357-374, February. [Downloadable!] (restricted)
    Other versions:
  9. Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(3), pages 3. [Downloadable!] (restricted)
    Other versions:
  10. Richard A. Musgrave, 1961. "Approaches to A Fiscal Theory of Political Federalism," NBER Chapters, in: Public Finances: Needs, Sources, and Utilization, pages 97-134 National Bureau of Economic Research, Inc. [Downloadable!]
  11. Goodspeed, Timothy J., 2000. "Tax structure in a federation," Journal of Public Economics, Elsevier, vol. 75(3), pages 493-506, March. [Downloadable!] (restricted)
  12. Lee, Young & Gordon, Roger H., 2005. "Tax structure and economic growth," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1027-1043, June. [Downloadable!] (restricted)
  13. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March. [Downloadable!]
  14. Motohiro Sato, 2000. "Fiscal Externalities and Efficient Transfers in a Federation," International Tax and Public Finance, Springer, vol. 7(2), pages 119-139, March. [Downloadable!] (restricted)
  15. David E. Wildasin, 2004. "The Institutions of Federalism: Toward an Analytical Framework," Public Economics 0403006, EconWPA. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lisa Grazzini & Alessandro Petretto, 2007. "Voting on Devolution in a Federal Country with a Bicameral National System," Working Papers Series wp2007_09, Universita' degli Studi di Firenze, Dipartimento di Scienze Economiche. [Downloadable!]
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