The aim of this paper is to determine to what extent and how federal taxes affect local tax decisions. Testing the impact of an increase in the federal tax on horizontal tax competition with Canada-US data for 1984--1994, we find evidence that an increase in federal tax affects horizontal tax competition. The novelty of our approach is that it indirectly tests the effect of an increase in federal tax on provincial tax, by testing whether provincial reaction to an increase in neighboring tax changes according to the federal tax level. The test allows for control of yearly macroeconomic shocks by inserting dummies for each year. These are not used in the empirical literature on vertical tax competition because they would cause perfect collinearity with the federal tax.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
8632.
Find related papers by JEL classification: H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism H7 - Public Economics - - State and Local Government; Intergovernmental Relations H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
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