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Optimal Taxation and Risk-Sharing Arrangements in an Economic Federation

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  • Aronsson, Thomas

    ()
    (Department of Economics, Umeå University)

  • Wikström, Magnus

    ()
    (Department of Economics, Umeå University)

Abstract

This paper analyzes optimal taxation and risk-sharing arrangements in an economy with two levels of government. Both levels provide public goods and finance their expenditures via labor income taxation, where the tax base is responsive to the private agents' labor supply decisions. The localities are assumed to experience different random productivity shocks, meaning hat the private labor supply decisions as well as the choices of income tax rates are carried out under uncertainty. Part of the central overnment's decision problem is then to provide ax revenue sharing between the local governments. The optimal degree of revenue sharing depends on whether or not the localities/regions differ with respect to labor supply incentives.

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Bibliographic Info

Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 538.

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Length: 24 pages
Date of creation: 06 Sep 2001
Date of revision:
Handle: RePEc:hhs:umnees:0538

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Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
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Web page: http://www.econ.umu.se/
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Keywords: Optimal taxation; multilevel government; fiscal externalities; uncertainty; risk-sharing;

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References

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  1. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
  2. repec:fth:louvco:9803 is not listed on IDEAS
  3. Robin Boadway and Michael Keen, . "Efficiency and the Optimal Direction of Federal-State Transfers," Economics Discussion Papers, University of Essex, Department of Economics 445, University of Essex, Department of Economics.
  4. Aronsson, Thomas & Wikström, Magnus, 1999. "Fiscal Externalities and Asymmetric Information in an Economic Federation," UmeÃ¥ Economic Studies, UmeÃ¥ University, Department of Economics 516, Umeå University, Department of Economics.
  5. BOADWAY, Robin & MARCHAND, Maurice & VIGNEAULT, Marianne, 1998. "The consequences of overlapping tax bases for redistribution and public spending in a federation," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1998003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Johnson, William R, 1988. "Income Redistribution in a Federal System," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 570-73, June.
  7. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(5), pages 979-1009, October.
  8. Hansson, Ingemar & Stuart, Charles, 1987. "The suboptimality of local taxation under two-tier fiscal federalism," European Journal of Political Economy, Elsevier, vol. 3(3), pages 407-411.
  9. Lockwood, Ben, 1999. "Inter-regional insurance," Journal of Public Economics, Elsevier, Elsevier, vol. 72(1), pages 1-37, April.
  10. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 64(3), pages 623-46, May.
  11. Lee, Kangoh, 1998. "Uncertain income and redistribution in a federal system," Journal of Public Economics, Elsevier, Elsevier, vol. 69(3), pages 413-433, September.
  12. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 757-74, September.
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