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A Positive Model of Overlapping Income Taxation in a Federation of States

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  • Esteban Klor

    (W. Allen Wallis Institute of Political Economy, University of Rochester)

Abstract

This paper develops a positive theory of overlapping income taxation in a federation of states. Its main motivation comes from the observation that in the U.S. states income tax rates are significantly lower than the federal income tax rate. The analysis shows that in a federal system total productivity dispersion between the states determines the federal tax rate. In fact, there exists a positive relation between the level of productivity dispersion and the federal tax rate, even if the income of the decisive voter is above the mean income. When the individuals' income is endogenous, the higher the implemented federal tax rate is, the lower the resulting state tax rate will be, even if the decisive voter at the state level has zero pre-tax income. Empirical evidence obtained from a panel data set on tax schedules at the state level supports the main hypothesis of the paper.

Suggested Citation

  • Esteban Klor, 2002. "A Positive Model of Overlapping Income Taxation in a Federation of States," Wallis Working Papers WP32, University of Rochester - Wallis Institute of Political Economy.
    • Handle: RePEc:roc:wallis:wp32
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    Cited by:

    1. Garth Heutel, 2014. "Crowding Out and Crowding In of Private Donations and Government Grants," Public Finance Review, , vol. 42(2), pages 143-175, March.
    2. Maravall Rodríguez, Carlos, 2005. "Fiscal federalism with a single instrument to finance government," UC3M Working papers. Economics we052213, Universidad Carlos III de Madrid. Departamento de Economía.
    3. Ben-Bassat, Avi & Dahan, Momi & Klor, Esteban F., 2016. "Is centralization a solution to the soft budget constraint problem?," European Journal of Political Economy, Elsevier, vol. 45(C), pages 57-75.
    4. Leandro M. De Magalhães & Lucas Ferrero, 2009. "Budgetary Separation of Powers in the American States and the Tax Level: A Regression Discontinuity Design," The Centre for Market and Public Organisation 09/225, The Centre for Market and Public Organisation, University of Bristol, UK.
    5. Leandro M. de Magalhães, 2011. "Political Parties and the Tax Level in the American States: A Regression Discontinuity Design," Bristol Economics Discussion Papers 11/622, School of Economics, University of Bristol, UK.

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    More about this item

    Keywords

    Fiscal Federalism; Political Economy; Income Taxation.;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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