Vertical Tax Competition with Tax Sharing and Equalization Grants
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.
Volume (Year): 65 (2006)
Issue (Month): 1 (May)
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