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

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

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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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Find related papers by JEL classification:
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, 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

This paper has been announced in the following NEP Reports:

NEP-ALL-2002-11-18 (All new papers)
NEP-PBE-2002-11-18 (Public Economics)

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