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Horizontal and Vertical Tax Externalities in a Multicountry World

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  • Ernesto Crivelli
  • Christian Volpe Martincus

    ()

Abstract

Recent contributions on tax competition recognize the interaction between both horizontal and vertical tax externalities in a single federation. In this paper, we extend the theoretical analysis to a framework with multiple federations (a Union). We show that the relative size of a federation in the Union determines not only the extent but also the direction of the tax ine¢ ciency. The equilibrium state tax is lower in relative small countries but surprisingly, vertical externalities are more likely to dominate there, i.e. for a relative small federation, the non-cooperative local tax rate is lower than for a relative large federation but still higher than the one observed in absence of tax competition. This result seems to contradict recent theoretical findings where a lower equilibrium state tax is followed by a dominant horizontal externality.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse8_2007.

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Length: 24
Date of creation: May 2007
Date of revision:
Handle: RePEc:bon:bonedp:bgse8_2007

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: Tax Competition; Horizontal Externalities; Vertical Externalities; Fragmentation; Fiscal Federalism;

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