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Sickness absence and health care in an economic federation

  • David Granlund


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    This paper addresses vertical fiscal externalities in a model where the state governments provide health care and the federal government provides a sickness benefit. Both levels of government tax labor income and policy decisions affect labor income as well as participation in the labor market. The results show that the vertical externality affecting the state governments’ policy decisions can be either positive or negative depending on, among other things, the wage elasticity of labor supply and the marginal product of expenditure on health care. Moreover, it is proved that the vertical fiscal externality will not vanish by assigning all powers of taxation to the states. Copyright Springer Science+Business Media, LLC 2007

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    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 14 (2007)
    Issue (Month): 4 (August)
    Pages: 503-524

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    Handle: RePEc:kap:itaxpf:v:14:y:2007:i:4:p:503-524
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    1. Michael Keen, 1997. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Working Papers 97/173, International Monetary Fund.
    2. Thomas Aronsson & Magnus Wikström, 2001. "Optimal Taxes and Transfers in a Multilevel Public Sector," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(2), pages 158-, February.
    3. Robin Boadway & Michael Keen, 1996. "Efficiency and the optimal direction of federal-state transfers," International Tax and Public Finance, Springer, vol. 3(2), pages 137-155, May.
    4. Brown, Sarah & Sessions, John G, 1996. " The Economics of Absence: Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 10(1), pages 23-53, March.
    5. Hansson, Ingemar & Stuart, Charles, 1987. "The suboptimality of local taxation under two-tier fiscal federalism," European Journal of Political Economy, Elsevier, vol. 3(3), pages 407-411.
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