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Tax Mix Corners and Other Kinks

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  • Federico Revelli

Abstract

This paper models the local tax mix determination process in the presence of statewide fiscal limitations--the decentralized government finance archetype--and shows how excess sensitivity of local public spending to grants (the conventionally and somewhat misleadingly termed "flypaper effect") arises in the constrained tax mix irrespective of whether lower or upper limits bind and how it cannot, in general, be taken as a symptom of local government overspending. An empirical application to Italian province panel data provides consistent evidence of the role of corner solutions produced by two-sided tax limits in explaining the sensitivity of local public expenditures to grants.

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  • Federico Revelli, 2013. "Tax Mix Corners and Other Kinks," Journal of Law and Economics, University of Chicago Press, vol. 56(3), pages 741-776.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/671479
    DOI: 10.1086/671479
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    Cited by:

    1. Federico Revelli, 2013. "Tax limits and local democracy," Working Papers 2013/29, Institut d'Economia de Barcelona (IEB).
    2. Federico Revelli, 2012. "Business taxation and economic performance in hierarchical government structures," Working Papers 2012/12, Institut d'Economia de Barcelona (IEB).
    3. Revelli Federico, 2012. "Business taxation and economic performance in hierarchical government structures," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201204, University of Turin.
    4. Federico Revelli, 2013. "Tax Mix Corners and Other Kinks," Journal of Law and Economics, University of Chicago Press, vol. 56(3), pages 741-776.
    5. Chirok Han & Goeun Lee, 2017. "Efficient Estimation of Linear Panel Data Models with Sample Selection and Fixed Effects," Discussion Paper Series 1707, Institute of Economic Research, Korea University.
    6. Bram Mahieu & Benny Geys & Bruno Heyndels, 2017. "Fiscal Fairness as a Political Argument," Kyklos, Wiley Blackwell, vol. 70(4), pages 622-640, November.
    7. Stijn Goeminne & Carine Smolders & Elke Vandorpe, 2017. "The real impact of a one-off fiscal restriction: empirical evidence of a flypaper effect in Flemish municipalities," Public Money & Management, Taylor & Francis Journals, vol. 37(4), pages 285-292, June.
    8. Revelli, Federico, 2013. "Tax Limits and Local Democracy," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201336, University of Turin.

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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