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Tax competition in federations and the welfare consequences of decentralization

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Author Info

  • Michael J. Keen

    (International Monetary Fund)

  • Christos Kotsogiannis

    (Department of Economics, University of Exeter)

Abstract

This paper explores the impact of intensified tax competition within federal systems characterized by the presence of both horizontal tax externalities between the states and vertical tax externalities between states and federal government. It shows that although these point in opposite directions (horizontal towards state taxes that are too low, vertical towards state taxes that are too high), leaving the net outcome unclear, intensified tax competition always worsens their combined effect. That is, intensified lower-level tax competition—in the form of an increase in the number of lower-level jurisdictions—is sure to reduce welfare, but this is not because, as usually supposed, it makes excessively low state taxes even lower; rather, it is welfare-reducing either for that reason or because it makes excessively high state taxes even higher.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0201.pdf
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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0201.

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Date of creation: Feb 2002
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Handle: RePEc:exe:wpaper:0201

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Postal: Streatham Court, Rennes Drive, Exeter EX4 4PU
Phone: (01392) 263218
Fax: (01392) 263242
Web page: http://business-school.exeter.ac.uk/about/departments/economics/
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Related research

Keywords: Federalism; Tax competition; Vertical and horizontal externalities; Decentralization;

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References

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  1. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March.
  2. BOADWAY, Robin & MARCHAND, Maurice & VIGNEAULT, Marianne, . "The consequences of overlapping tax bases for redistribution and public spending in a federation," CORE Discussion Papers RP -1326, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. repec:fth:louvco:9803 is not listed on IDEAS
  4. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
  5. 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.
  6. Keen, M. & Marchand, M., . "Fiscal competition and the pattern of public spending," CORE Discussion Papers RP -1284, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
  8. Robin Boadway & Michael Keen, 1996. "Efficiency and the optimal direction of federal-state transfers," International Tax and Public Finance, Springer, vol. 3(2), pages 137-155, May.
  9. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  10. Cassing, J H & Hillman, A L, 1982. "State-Federal Resource Tax Rivalry: The Queensland Railway and the Federal Export Tax," The Economic Record, The Economic Society of Australia, vol. 58(162), pages 235-41, September.
  11. MINTZ, Jack & TULKENS, Henry, . "Commodity tax competition between member states of a federation: equilibrium and efficiency," CORE Discussion Papers RP -693, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  13. 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.
  14. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June Cita.
  15. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  16. Michael Keen, 1997. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Working Papers 97/173, International Monetary Fund.
  17. 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, 04.
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