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Federal-State Tax Interactions in the United States and Canada

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  • Howard Chernick
  • Jennifer Tennant

Abstract

The potential for vertical tax competition is strongest when different levels of government share the same base. Because there is greater sharing of common tax bases in Canada than in the United States, we expect vertical tax competition to be weaker in the United States than in Canada. Econometric analysis of US data supports this hypothesis. Taking account of the deductibility-related endogeneity of federal tax burdens by state, federal income tax burdens have no effect on average state income tax burdens. Introducing distributional considerations into the vertical tax competition model, we do find a significant displacement effect for higher income taxpayers, with higher federal burdens associated with lower state income tax burdens in the highest income quintile. For low-income taxpayers, federal and state tax burdens are complementary. Copyright 2010, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Publius: The Journal of Federalism.

Volume (Year): 40 (2010)
Issue (Month): 3 (Summer)
Pages: 508-533

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Handle: RePEc:oup:publus:v:40:y:2010:i:3:p:508-533

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  1. Devereux, M.P. & Lockwood, B. & Redoano, M., 2007. "Horizontal and vertical indirect tax competition: Theory and some evidence from the USA," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 451-479, April.
  2. Michael Smart, 2007. "Raising taxes through equalization," Canadian Journal of Economics, Canadian Economics Association, vol. 40(4), pages 1188-1212, November.
  3. Chernick, Howard, 2005. "On the Determinants of Subnational Tax Progressivity in the U.S," National Tax Journal, National Tax Association, vol. 58(1), pages 93-112, March.
  4. Besley, Timothy J. & Rosen, Harvey S., 1998. "Vertical externalities in tax setting: evidence from gasoline and cigarettes," Journal of Public Economics, Elsevier, vol. 70(3), pages 383-398, December.
  5. Gilbert E. Metcalf, 2008. "Assessing the Federal Deduction for State and Local Tax Payments," NBER Working Papers 14023, National Bureau of Economic Research, Inc.
  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.
  7. Esteller-Moré, Álex & Solé-Ollé, Albert, 1999. "Vertical income tax externalities and fiscal interdependence: evidence from the US," ZEW Discussion Papers 99-28, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. Martin Feldstein & Gilbert Metcalf, 1986. "The Effect of Federal Tax Deductibility on State and Local Taxes and Spending," NBER Working Papers 1791, National Bureau of Economic Research, Inc.
  9. Helen F. Ladd, 1993. "State responses to the TRA86 revenue windfalls: A new test of the flypaper effect," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 82-103.
  10. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
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Cited by:
  1. Giorgio Brosio & Juan Pablo Jiménez, 2011. "Maintaining taxes at the centre despite decentralization: interactions with national reforms," ICER Working Papers 10-2011, ICER - International Centre for Economic Research.

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