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A New Approach to Estimating Tax Interactions in Fiscal Federalism

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  • Kazuko Miyamoto
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    Abstract

    The purpose of this paper is to propose a new approach to empirically analyze the existence of strategic interactions of taxation between state governments (horizontal) and between state and federal governments (vertical) using gasoline and cigarette taxation in the U.S. I explicitly estimate the structural parameters of consumer's utility and state governmentfs objective functions. The slopes of the reaction functions, which represent the strategic interactions of state government taxation policies, are then computed given the estimated structural parameters. Empirical results show that contrary to the existing literature, there is very little horizontal tax interaction in both the gasoline and cigarette cases. On the other hand, there is a moderate positive vertical tax interaction for both gasoline and cigarette taxes and the scale is larger in the case of cigarette taxes. Furthermore, the value and sign of the slopes of the reaction function are very different across states. This suggests a new policy implication: as state governments respond differently to federal government fiscal policy, uniform fiscal policy is not appropriate for welfare maximization of the nation.

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    File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd08-053.pdf
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    Bibliographic Info

    Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd08-053.

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    Date of creation: Mar 2009
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    Handle: RePEc:hst:ghsdps:gd08-053

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    Keywords: tax interaction; cross border shopping;

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    1. Lucas, Vander, 2004. "Cross-border shopping in a federal economy," Regional Science and Urban Economics, Elsevier, vol. 34(4), pages 365-385, July.
    2. Marius BRÜLHART & Mario JAMETTI, 2004. "Vertical Versus Horizontal Tax Externalities: An Empirical Test," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.11, Université de Lausanne, Faculté des HEC, DEEP.
    3. Hoyt, William H., 2001. "Tax Policy Coordination, Vertical Externalities, and Optimal Taxation in a System of Hierarchical Governments," Journal of Urban Economics, Elsevier, vol. 50(3), pages 491-516, November.
    4. 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.
    5. Jack Mintz & Henry Tulkens, 1984. "Commodity Tax Competition Between Member States of a Federation," Working Papers 558, Queen's University, Department of Economics.
    6. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
    7. Esteller-More, Alex & Sole-Olle, Albert, 2001. "Vertical income tax externalities and fiscal interdependence: evidence from the US," Regional Science and Urban Economics, Elsevier, vol. 31(2-3), pages 247-272, April.
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