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Multi-stage Taxation by Subnational Governments: Welfare Effects

Author

Listed:
  • Walter Cont
  • Diego Fernández Felices

Abstract

This paper analyzes multi-stage taxation by provinces in a federal country, using a twogood, two-province, two-stage successive differentiated-product symmetric oligopoly model, where each producer is located in a province and sells its product through exclusive retailers located in both provinces. Retailers compete for consumers a la Bertrand with differentiated products. The producer-retailer setup allows provincial governments to raise taxes on both upstream and downstream links of the value chain. We solve a simultaneous and non-cooperative tax competition problem, where (symmetric) provinces choose tax rates to maximize welfare subject to a revenue constraint. We find that provinces set tax rates to either raise revenue at only one segment of the value chain or use a combination of upstream and downstream taxation. This choice is determined by the revenue requirement, the size of the market and the degree of downstream competition. We characterize and discuss each possible case. Comparing the results of this model with the Leviathan case (analyzed in a previous paper by the authors) where governments behave as revenue maximizers, we find that there is a threshold on revenue requirement such that welfarist governments tend to behave qualitatively similar to Leviathan governments when revenue need exceed the threshold: they both choose a combination of taxes if products have some degree of heterogeneity, whereas they rely on downstream taxation when products are homogeneous. This way we provide a rationale for raising taxes on successive taxation even when governments internalize the effect of successive taxation on welfare.

Suggested Citation

  • Walter Cont & Diego Fernández Felices, 2017. "Multi-stage Taxation by Subnational Governments: Welfare Effects," IIE, Working Papers 111, IIE, Universidad Nacional de La Plata.
  • Handle: RePEc:akh:wpaper:111
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    References listed on IDEAS

    as
    1. Alberto Porto & Marcelo Garriga & Walter Rosales, 2014. "Impuesto a los ingresos brutos: "ave Fenix"de la estructura tributaria subnacional," Estudios Economicos, Universidad Nacional del Sur, Departamento de Economia, vol. 31(62), pages 49-85, january-j.
    2. Robert D. Ebel & LeAnn Luna & Matthew N. Murray, 2016. "State General Business Taxation One More Time: Cit, Grt, or Vat?," National Tax Journal, National Tax Association;National Tax Journal, vol. 69(4), pages 739-762, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    local indirect taxation; multistage taxes; tax competition; welfare taxation.;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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