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Vertical Tax Competition with Tax Sharing and Equalization Grants

Author

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  • Lisa Grazzini

    () (University of Florence)

  • Alessandro Petretto

    () (University of Florence)

Abstract

The aim of this paper is to analyse how vertical fiscal externalities affect local tax policies within a federal country. According to the theoretical literature on fiscal federalism, the direction of this impact is ambiguous, although a complementarity between the two tax policies, federal and local, tends to prevail. Our main result shows instead that, with a more general system of financing local public expenditure, federal and local policies tend more easily to be strategic substitutes. Such a result is obtained within a federation where local public expenditures are financed through three different tax instruments: a surtax on the local fiscal base, a revenue sharing, and an equalization grant. This financing system is rather general and in some sense similar to that provided by the recently reformed Italian Constitution.

Suggested Citation

  • Lisa Grazzini & Alessandro Petretto, 2006. "Vertical Tax Competition with Tax Sharing and Equalization Grants," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(1), pages 75-94, May.
  • Handle: RePEc:gde:journl:gde_v65_n1_p75-94
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    References listed on IDEAS

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    Cited by:

    1. Thiess Buettner & Robert Schwager & Sebastian Hauptmeier, 2011. "Efficient Revenue Sharing and Upper-Level Governments: Theory and Application to Germany," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 647-667, December.
    2. Lisa Grazzini & Alessandro Petretto, 2012. "Voting on devolution in a federal country with a bicameral national system," Economics of Governance, Springer, vol. 13(1), pages 51-72, March.

    More about this item

    Keywords

    fiscal federalism; fiscal externality; vertical tax competition;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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