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Mergers in fiscal federalism

Listed author(s):
  • Breuillé, Marie-Laure
  • Zanaj, Skerdilajda

We analyze how the merger of regions affects capital tax competition in a two-tier territorial organization where both regions and cities share the same mobile tax base. We identify three effects generated by the merger of regions that impact, either directly or indirectly, both regional and local tax choices: i) an alleviation of tax competition at the regional level, ii) a scale effect in the provision of regional public goods, and iii) a larger internalization of vertical tax externalities generated by cities. We show that the merger of regions always increases regional tax rates while decreasing local tax rates. These results are robust to a change in the timing of the game.

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File URL: http://www.sciencedirect.com/science/article/pii/S0047272713000467
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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 105 (2013)
Issue (Month): C ()
Pages: 11-22

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Handle: RePEc:eee:pubeco:v:105:y:2013:i:c:p:11-22
DOI: 10.1016/j.jpubeco.2013.02.009
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Keen, Michael J. & Kotsogiannis, Christos, 2004. "Tax competition in federations and the welfare consequences of decentralization," Journal of Urban Economics, Elsevier, vol. 56(3), pages 397-407, November.
  2. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
  3. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
  4. Lisa Grazzini & Alessandro Petretto, 2007. "Tax Competition between Unitary and Federal Countries," Economics of Governance, Springer, vol. 8(1), pages 17-36, January.
  5. Konrad, Kai A. & Schjelderup, Guttorm, 1999. "Fortress Building in Global Tax Competition," Journal of Urban Economics, Elsevier, vol. 46(1), pages 156-167, July.
  6. Hoyt, William H., 2001. "Tax Policy Coordination, Vertical Externalities, and Optimal Taxation in a System of Hierarchical Governments," Journal of Urban Economics, Elsevier, vol. 50(3), pages 491-516, November.
  7. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
  8. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
  9. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  10. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  11. Lisa Grazzini & Tanguy Van Ypersele, 2003. "Fiscal Coordination and Political Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 305-325, 04.
  12. Sam Bucovetsky, 2009. "An index of capital tax competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(6), pages 727-752, December.
  13. Michael Keen & Christos Kotsogiannis, 2003. "Leviathan and Capital Tax Competition in Federations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 177-199, 04.
  14. Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 454-485, September.
  15. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
  16. Breuillé, Marie-Laure & Vigneault, Marianne, 2010. "Overlapping soft budget constraints," Journal of Urban Economics, Elsevier, vol. 67(3), pages 259-269, May.
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