Incomplete Information in Tax Setting of Local Governments: a Theoretical Framework
AbstractIn the literature, tax interaction is mainly due to tax and yardstick competition. However, we suppose that tax interaction appears when the local policy maker conforms his fiscal policy to decisions taken by his neighbourhood to fill information gaps. Theoretical results show that incomplete information leads to tax mimicking and a higher level of tax rate. Moreover, leviathan governments are more sensitive than benevolent ones to changes in neighbours tax rates (horizontal tax interaction) but less to changes in the central government tax rate (vertical tax interaction). Finally, there is no tax rate internalization effects because an increase in the central government tax rate is not followed by an equivalent decrease of local government tax rate.
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Bibliographic InfoPaper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 295.
Date of creation: Aug 2007
Date of revision:
incomplete information; informative trend; political trend; tax mimicking;
Find related papers by JEL classification:
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-16 (All new papers)
- NEP-PBE-2007-09-16 (Public Economics)
- NEP-URE-2007-09-16 (Urban & Real Estate Economics)
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