IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Horizontal Versus Vertical Tax Competition: An Empirical Test

  • Mario Jametti
  • Marius Brülhart

In a federation, where different levels of government tax the same base, one can observe two types of externalities: a horizontal externality, working among jurisdictions of the same hierarchical level and leading to tax rates that are suboptimally low; and a vertical externality, working between different hierarchical levels of government and leading to suboptimally high tax rates. By parameterising a model of taxation in a federation that incorporates those two forces (Keen and Kotsogiannis, AER, 2002), we develop an empirically implementable discriminating hypothesis to distinguish horizontal from vertical tax-setting externalities. In essence, the test predicts that increasing jurisdictional fragmentation of a federation lowers the average tax rate of the lower-level jurisdiction if horizontal externalities dominate, but raises their average tax rate if vertical externalities dominate. This test is applied to a new and original data set on Swiss municipal and cantonal taxes, exploiting Switzerland's uniquely decentralised three-tier hierarchical structure of tax-raising powers. The main attraction of this data set is that it allows comparisons across federations (i.e. cantons) as well as within federations (over time), while existing studies of vertical tax externalities had to rely on pure time-series data. Using panel data models with instrumental variables to account for the potential endogeneity of the tax rates applied by higher-level jurisdictions, we estimate the theory-based discriminatory relationship between municipal tax rates and the jurisdictional fragmentation of cantons. This is done separately for corporate and personal tax rates applying to different representative types of tax payers. We find evidence of both vertical and horizontal externalities, depending on the type of tax and tax payer

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 303.

as
in new window

Length:
Date of creation: 11 Aug 2004
Date of revision:
Handle: RePEc:ecm:nawm04:303
Contact details of provider: Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
Email:


More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ecm:nawm04:303. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.