The consequences of overlapping tax bases for redistribution and public spending in a federation
Tax and expenditure policies are studied in a federation with imperfectly mobile households. States implement a linear progressive tax and supply a public good. A vertical ï¬scal externality, reï¬‚ecting the effect of the state policies on federal revenues, provides an incentive to state taxes to be too progressive. A horizontal ï¬scal externality causes non-optimal states taxes and expenditures of the migration effect. The federal government implements its own linear progressive tax and makes transfers to the states. The federal government implements its own linear progressive tax and makes transfers to the states. The federal government can nullify both externalities by appropriate ï¬scal policies, and redistributive taxation can be decentralized to the states
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