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Optimal taxation and intergovernmental transfer in a dynamic model with multiple levels of government

  • Liutang Gong

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University)

  • Heng-fu Zou

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University
    Development Research Group, The World Bank)

In this paper, we study the optimal choices of the federal income tax, federal transfers, and local taxes in a dynamic model of capital accumulation and with explicit gamestructure s among multipleprivateage nts, multiplelocal governments, and the federal government. In general, the optimal local property tax is zero if the local property tax is constrained to be nonnegative, whereas the optimal local consumption tax is always positive. When the local consumption tax is chosen optimally, the federal income tax can be either positive or negative. For most reasonable parameter values, our numerical calculations have shown that with a positive local consumption tax there exists a reverse transfer from local governments to the federal government.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 54.

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Date of creation: 2001
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Publication status: Published in Journal of Economic Dynamics and Control, Volume 26, Issue 12, October 2002, Pages 1975-2003
Handle: RePEc:cuf:wpaper:54
Contact details of provider: Web page: http://cema.cufe.edu.cn/
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  22. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May.
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