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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.

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Bibliographic Info

Paper provided by University of Rochester - Wallis Institute of Political Economy in its series Wallis Working Papers with number WP32.

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Length: pages
Date of creation: Oct 2002
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Handle: RePEc:roc:wallis:wp32

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Postal: University of Rochester, Wallis Institute, Harkness 109B Rochester, New York 14627 U.S.A.

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Keywords: Fiscal Federalism; Political Economy; Income Taxation.;

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  8. Boadway, Robin & Marchand, Maurice & Vigneault, Marianne, 1998. "The consequences of overlapping tax bases for redistribution and public spending in a federation," Journal of Public Economics, Elsevier, vol. 68(3), pages 453-478, June.
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  13. repec:fth:louvco:9803 is not listed on IDEAS
  14. Henning Bohn & Charles Stuart, 2003. "Voting and Nonlinear Taxes in a Stylized Representative Democracy," CESifo Working Paper Series 1058, CESifo Group Munich.
  15. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
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  17. Johnson, William R, 1988. "Income Redistribution in a Federal System," American Economic Review, American Economic Association, vol. 78(3), pages 570-73, June.
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  19. Goodspeed, Timothy J., 1999. "Tax competition and tax structure in open federal economies: evidence from OECD countries with implications for the European Union," ZEW Discussion Papers 99-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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Cited by:
  1. 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, Department of Economics, University of Bristol, UK.
  2. Carlos Maravall Rodriguez, 2005. "Fiscal Federalism With A Single Instrument To Finance Government," Economics Working Papers we052213, Universidad Carlos III, Departamento de Economía.
  3. 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, Department of Economics, University of Bristol, UK.

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