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Mergers in Fiscal Federalism

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  • Marie-Laure Breuillé

    ()
    (Université Catholique de Louvain)

  • Skerdilajda Zanaj

    ()
    (CREA, University of Luxembourg)

Abstract

This paper analyzes mergers of regions in a two-tier setting with both horizontal and vertical tax competition. The merger of regions induces three effects on regional and local tax policies, which are transmitted both horizontally and vertically: i) an alleviation of tax competition at the regional level, ii) a rise in the regional tax base, and iii) a larger internalization of tax externalities generated by cities. It is shown that the merger of regions increases regional tax rates while decreasing local tax rates. This Nash equilibrium with mergers is then compared with the Nash equilibrium with coalitions of regions.

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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 10-10.

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Date of creation: 2010
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Handle: RePEc:luc:wpaper:10-10

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Keywords: Mergers; Tax Competition; Fiscal Federalism;

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References

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  1. Lisa Grazzini & Alessandro Petretto, 2007. "Tax Competition between Unitary and Federal Countries," Economics of Governance, Springer, Springer, vol. 8(1), pages 17-36, January.
  2. 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.
  3. Michael Keen, 1997. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Working Papers, International Monetary Fund 97/173, International Monetary Fund.
  4. WILDASIN, David, . "Nash equilibria in models of fiscal competition," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -804, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. 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.
  6. Michael Keen & Christos Kotsogiannis, 2003. "Leviathan and Capital Tax Competition in Federations," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 177-199, 04.
  7. Konrad, Kai A. & Schjelderup, Guttorm, 1999. "Fortress Building in Global Tax Competition," Journal of Urban Economics, Elsevier, vol. 46(1), pages 156-167, July.
  8. Breuillé, Marie-Laure & Vigneault, Marianne, 2010. "Overlapping soft budget constraints," Journal of Urban Economics, Elsevier, vol. 67(3), pages 259-269, May.
  9. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  10. Lisa Grazzini & Tanguy Van Ypersele, 2003. "Fiscal Coordination and Political Competition," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 305-325, 04.
  11. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, American Economic Association, vol. 92(1), pages 363-370, March.
  12. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, Elsevier, vol. 74(1), pages 53-80, October.
  13. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 642, University of Warwick, Department of Economics.
  14. Sam Bucovetsky, 2009. "An index of capital tax competition," International Tax and Public Finance, Springer, Springer, vol. 16(6), pages 727-752, December.
  15. Michael J. Keen & Christos Kotsogiannis, 2002. "Tax competition in federations and the welfare consequences of decentralization," Discussion Papers, Exeter University, Department of Economics 0201, Exeter University, Department of Economics.
  16. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
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  1. Mergers and tax competition
    by Economic Logician in Economic Logic on 2010-11-19 15:05:00

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