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Capital Taxation in a Fiscal Union – Implications of Simultaneous Horizontal and Decentralized Leadership

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Abstract

This article concerns capital taxation and public good provision in a two-layer fiscal union where the federal government uses lump-sum transfers to redistribute resources between two local jurisdictions, and where each local government uses a capital tax and a lump-sum tax to finance the provision of a local public good. The novelty is to allow for simultaneous horizontal and decentralized leadership (double leadership) which means that one of the local governments is able to exercise Stackelberg leadership both vis-a-vis the other local government and vis-a-vis the federal government. Among the results it is shown that the capital tax becomes redundant as a policy instrument for the double leader if the other state government acts as a decentralized leader vis-a-vis the federal government. If, instead, the other state government does not exercise leadership vis-a-vis the federal government then the double leader will implement a capital tax which is allocatively efficient from the perspective of the fiscal union as a whole. It is also shown that double leadership exacerbates the under-taxation inefficiency that earlier research has shown exists in a fiscal union with decentralized leadership.

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  • Sjögren, Tomas, 2017. "Capital Taxation in a Fiscal Union – Implications of Simultaneous Horizontal and Decentralized Leadership," Umeå Economic Studies 947, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0947
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    More about this item

    Keywords

    Federalism; capital taxation; commitment; leadership;
    All these keywords.

    JEL classification:

    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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