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Optimal Federal Taxes with Public Inputs

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  • Diego Martínez

Abstract

This paper deals with the solution to vertical expenditure externalities in a federation with two levels of government sharing taxes. Under these circumstances, the Nash equilibrium does not satisfy the condition for production efficiency in the provision of public inputs. This vertical expenditure externality is removed when the federal government, behaving as Stackelberg leader, chooses the optimal tax rate on l abor income. The sign of this tax rate depends on the elasticity of marginal productivity of the public input with respect to employment. M oreover, the previous result that the two vertical (tax and expenditure) externalities are independent of each other is confirmed here.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 64 (2008)
Issue (Month): 4 (December)
Pages: 422-433

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200812)64:4_422:oftwpi_2.0.tx_2-y

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Keywords: vertical externalities; public inputs; federal taxes;

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References

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  1. Christos Kotsogiannis & Diego Martinez, 2007. "Ad Valorem Taxes and the Fiscal Gap in Federations," Discussion Papers 0703, Exeter University, Department of Economics.
  2. Boadway, Robin & Marchand, Maurice & Vigneault, Marianne, 1998. "The consequences of overlapping tax bases for redistribution and public spending in a federation," Journal of Public Economics, Elsevier, vol. 68(3), pages 453-478, June.
  3. 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.
  4. Robin Boadway & Michael Keen, 1999. "Redistribution," Working Papers 983, Queen's University, Department of Economics.
  5. Robin Boadway and Michael Keen, . "Efficiency and the Optimal Direction of Federal-State Transfers," Economics Discussion Papers 445, University of Essex, Department of Economics.
  6. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
  7. 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.
  8. Johnson, William R, 1991. "Decentralized Income Redistribution Reconsidered," Economic Inquiry, Western Economic Association International, vol. 29(1), pages 69-78, January.
  9. repec:fth:louvco:9803 is not listed on IDEAS
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Cited by:
  1. Diego Martinez & Tomas Sjögren, 2012. "Vertical externalities with lump-sum taxes: how much difference does unemployment make?," Working Papers 2012/25, Institut d'Economia de Barcelona (IEB).

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