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Federal tax competition and the efficiency consequences for local taxation of revenue equalization

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  • Christos Kotsogiannis

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Abstract

Recent work has shown that a system of equalization grants can limit tax competition among lower-level governments. The structure of such models, however, does not allow for the federal to be an active player but its role is being limited in the administration of the equalization grants. The implication of this is that potentially important, for the efficiency properties of lower-level government taxation, vertical fiscal externalities are ignored. This paper introduces equalization grants into a standard federal capital tax competition model in which fiscal externalities arise not only horizontally, between jurisdictions, but also vertically between the levels of government. It is shown that, even in the presence of vertical fiscal inefficiencies, efficiency in the level of lower-level government taxation can be achieved by a modifying version of a standard equalization grant formula.

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File URL: http://hdl.handle.net/10.1007/s10797-008-9094-8
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 17 (2010)
Issue (Month): 1 (February)
Pages: 1-14

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Handle: RePEc:kap:itaxpf:v:17:y:2010:i:1:p:1-14

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Federal tax competition; Fiscal externalities; Equalization grants; H41; H71; H77;

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References

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  1. 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.
  2. Buettner, Thiess & Hauptmeier, Sebastian & Schwager, Robert, 2006. "Efficient Revenue Sharing and Upper Level Governments: Theory and Application to Germany," ZEW Discussion Papers 06-13, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Leonzio Rizzo, 2008. "Local government responsiveness to federal transfers: theory and evidence," International Tax and Public Finance, Springer, Springer, vol. 15(3), pages 316-337, June.
  4. Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, 01.
  5. Michael Smart, 2007. "Raising Taxes through Equalization," CESifo Working Paper Series 1926, CESifo Group Munich.
  6. Boadway, R & Keen, M, 1996. "Efficiency and the optimal direction of federal-state transfers," IFS Working Papers, Institute for Fiscal Studies W96/01, Institute for Fiscal Studies.
  7. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
  8. Sotiris Karkalakos & Christos Kotsogiannis, 2007. "A spatial analysis of provincial corporate income tax responses: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 782-811, August.
  9. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  10. DePeter James A. & Myers Gordon M., 1994. "Strategic Capital Tax Competition: A Pecuniary Externality and a Corrective Device," Journal of Urban Economics, Elsevier, vol. 36(1), pages 66-78, July.
  11. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, December.
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Cited by:
  1. Jorge Martinez-Vazquez & Cristian Sepulveda, 2012. "Toward a More General Theory of Revenue Assignments," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1231, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Christian Kelders & Marko Koethenbuerger, 2010. "Tax incentives in fiscal federalism: an integrated perspective," Canadian Journal of Economics, Canadian Economics Association, vol. 43(2), pages 683-703, May.
  3. Sotiris Karkalakos & Christos Kotsogiannis, 2007. "A spatial analysis of provincial corporate income tax responses: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 782-811, August.
  4. Baskaran, Thushyanthan & Lopes da Fonseca, Mariana, 2013. "The economics and empirics of tax competition: A survey," Center for European, Governance and Economic Development Research Discussion Papers 163, University of Goettingen, Department of Economics.

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