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Optimal Federal Taxes with Public Inputs

  • Diego Martínez

This paper deals with the solution to vertical expenditure externalities in a federation with two levels of government sharing taxes. Under these circumstances, the Nash equilibrium does not satisfy the condition for production efficiency in the provision of public inputs. This vertical expenditure externality is removed when the federal government, behaving as Stackelberg leader, chooses the optimal tax rate on l abor income. The sign of this tax rate depends on the elasticity of marginal productivity of the public input with respect to employment. M oreover, the previous result that the two vertical (tax and expenditure) externalities are independent of each other is confirmed here.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 64 (2008)
Issue (Month): 4 (December)
Pages: 422-433

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200812)64:4_422:oftwpi_2.0.tx_2-y
DOI: 10.1628/001522108X397615
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  1. Robin Boadway and Michael Keen, . "Efficiency and the Optimal Direction of Federal-State Transfers," Economics Discussion Papers 445, University of Essex, Department of Economics.
  2. Boadway, Robin & Marchand, Maurice & Vigneault, Marianne, 1998. "The consequences of overlapping tax bases for redistribution and public spending in a federation," Journal of Public Economics, Elsevier, vol. 68(3), pages 453-478, June.
  3. Christos Kotsogiannis & Diego Martinez, 2007. "Ad Valorem Taxes and the Fiscal Gap in Federations," Discussion Papers 0703, Exeter University, Department of Economics.
  4. Johnson, William R, 1991. "Decentralized Income Redistribution Reconsidered," Economic Inquiry, Western Economic Association International, vol. 29(1), pages 69-78, January.
  5. Boadway, Robin & Keen, Michael, 2000. "Redistribution," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 12, pages 677-789 Elsevier.
  6. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May.
  7. 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.
  8. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
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