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Interjurisdictional Tax Competition in a Federal System of Overlapping Revenue Maximizing Governments

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  • Laurent Flochel
  • Thierry Madies

Abstract

Academic literature in public finance has focused on interjurisdictional tax competition—namely among similar types of local governments—but has leaved vertical externalities arising from interactions between two overlapping governments sharing the same tax base aside. The purpose of this paper is to provide a simple model within which interjurisdictional tax competition and vertical interactions between two overlapping governments that share the same tax base can be analyzed simultaneously. We find that interjurisdictional tax competition reduces the global tax rate set by both overlapping governments (federal and local) but is unable to solve completely the distortion arising from vertical externalities. The model is also extended to allow for government subsidies to industrial capital. We give sufficient conditions for capital subsidies to be more efficient to attract capital when they are granted at a federal level rather than at a local level. Copyright Kluwer Academic Publishers 2002

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  • Laurent Flochel & Thierry Madies, 2002. "Interjurisdictional Tax Competition in a Federal System of Overlapping Revenue Maximizing Governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(2), pages 121-141, March.
    • Handle: RePEc:kap:itaxpf:v:9:y:2002:i:2:p:121-141
    DOI: 10.1023/A:1014695219494
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    References listed on IDEAS

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    1. Oates, Wallace E, 1985. "Searching for Leviathan: An Empirical Study," American Economic Review, American Economic Association, vol. 75(4), pages 748-757, September.
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    Cited by:

    1. William Hoyt, 2005. "The Assignment and Division of the Tax Base in a System of Hierarchical Governments," Working Papers 2005-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    2. Florence Lachet-Touya, 2013. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers hal-02945285, HAL.
    3. Vasilyeva, Olga & Libman, Alexander, 2020. "Varieties of authoritarianism matter: Elite fragmentation, natural resources and economic growth," European Journal of Political Economy, Elsevier, vol. 63(C).
    4. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers hal-02939340, HAL.
    5. William H. Hoyt, 2017. "The assignment and division of the tax base in a system of hierarchical governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(4), pages 678-704, August.
    6. Florence TOUYA, 2009. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers 9, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Nov 2009.
    7. Florence Lachet-Touya, 2009. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers hal-03551027, HAL.
    8. Jonathan Klick & Francesco Parisi, 2005. "Intra-Jurisdictional Tax Competition," Constitutional Political Economy, Springer, vol. 16(4), pages 387-395, December.
    9. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working papers of CATT hal-02939399, HAL.
    10. Willi Leibfritz & Paul O'Brien, 2005. "The French Tax System: Main Characteristics, Recent Developments and Some Considerations for Reform," OECD Economics Department Working Papers 439, OECD Publishing.
    11. Grazzini Lisa & Petretto Alessandro, 2015. "Federalism with Bicameralism," German Economic Review, De Gruyter, vol. 16(2), pages 138-160, May.
    12. 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.
    13. Florence Lachet-Touya, 2013. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working papers of CATT hal-02945285, HAL.
    14. Florence Lachet-Touya, 2009. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working papers of CATT hal-03551027, HAL.
    15. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working papers of CATT hal-02939340, HAL.
    16. Alexander Libman, 2012. "Sub-national political regimes and asymmetric fiscal decentralization," Constitutional Political Economy, Springer, vol. 23(4), pages 302-336, December.
    17. 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.
    18. 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, April.
    19. Florence TOUYA, 2013. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers 2012-2013_9, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Jul 2013.
    20. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers hal-02939399, HAL.

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