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Vertical externalities in tax setting: evidence from gasoline and cigarettes

  • Besley, Timothy J.
  • Rosen, Harvey S.

A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.2-cent increase in the state tax rate.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 70 (1998)
Issue (Month): 3 (December)
Pages: 383-398

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Handle: RePEc:eee:pubeco:v:70:y:1998:i:3:p:383-398
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  9. Daniel R. Feenberg & Andrew W. Mitrusi & James M. Poterba, 1997. "Distributional Effects of Adopting a National Retail Sales Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 49-90 National Bureau of Economic Research, Inc.
  10. Timothy Besley & Anne Case, 1995. "Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 769-798.
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