Tax and expenditure policies are studied in a federation with imperfectly mobile households. States implement a linear progressive tax and supply a public good. A vertical fiscal externality, reflecting the effect of state policies on federal revenues, provides an incentive for state taxes to be too progressive. A horizontal fiscal externality causes non-optimal states taxes and expenditures because of the migration effect. The federal government implements its own linear progressive tax and makes transfers to the states. The federal government can nullify both externalities by appropriate fiscal policies, and redistributive taxation can be decentralized to the states.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
963.
Find related papers by JEL classification: H2 - Public Economics - - Taxation, Subsidies, and Revenue H7 - Public Economics - - State and Local Government; Intergovernmental Relations
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