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Optimal federal taxes with public inputs

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  • Diego Martínez

    ()
    (Department of Economics, Universidad Pablo de Olavide)

Abstract

This paper deals with the solution to vertical expenditure externalities in a federation with two levels of government sharing taxes. Under these circumstances, the Nash equilibrium does not satisfy the condition for production efficiency in the provision of public inputs. This vertical expenditure externality is removed when the federal government, behaving as Stackelberg leader, chooses the optimal tax rate on labor income. The sign of this tax rate depends on the elasticity of marginal productivity of the public input with respect to employment. Moreover, the previous result concerning both vertical (tax and expenditure) externalities are independent each other is confirmed here.

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File URL: http://www.upo.es/serv/bib/wps/econ0716.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 07.16.

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Length: 14 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:pab:wpaper:07.16

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Keywords: vertical externalities; public input; federal taxes.;

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  1. Boadway, Robin & Keen, Michael, 2000. "Redistribution," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 12, pages 677-789 Elsevier.
  2. repec:fth:louvco:9803 is not listed on IDEAS
  3. 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.
  4. Christos Kotsogiannis & Diego Martinez, 2007. "Ad Valorem Taxes and the Fiscal Gap in Federations," Discussion Papers 0703, Exeter University, Department of Economics.
  5. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
  6. 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.
  7. 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.
  8. BOADWAY, Robin & MARCHAND, Maurice & VIGNEAULT, Marianne, 1998. "The consequences of overlapping tax bases for redistribution and public spending in a federation," CORE Discussion Papers 1998003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Johnson, William R, 1991. "Decentralized Income Redistribution Reconsidered," Economic Inquiry, Western Economic Association International, vol. 29(1), pages 69-78, January.
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