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Federal Tax Competition and the Efficiency Consequences for Local Taxation of Revenue Equalization

Author

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  • Christos Kotsogiannis

    (Department of Economics, University of Exeter)

Abstract

Recent work has shown that a system of equalization grants can limit tax competition among lower-level governments. The structure of such models, however, does not allow for the federal to be an active player but its role is being limited in the administration of the equalization grants. The implication of this is that potentially important, for the efficiency properties of lower-level government taxation, vertical fiscal externalities are ignored. This paper introduces equalization grants into a standard federal capital tax competition model in which fiscal externalities arise not only horizontally, between jurisdictions, but also vertically between the levels of government. It is shown that, even in the presence of vertical fiscal inefficiencies, efficiency in the level of lower-level government taxation can be achieved by a modifying version of a standard equalization grant formula.

Suggested Citation

  • Christos Kotsogiannis, 2007. "Federal Tax Competition and the Efficiency Consequences for Local Taxation of Revenue Equalization," Discussion Papers 0701, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0701
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    File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0701.pdf
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    References listed on IDEAS

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    1. Thiess Buettner & Robert Schwager & Sebastian Hauptmeier, 2011. "Efficient Revenue Sharing and Upper-Level Governments: Theory and Application to Germany," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 647-667, December.
    2. Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, January.
    3. Michael Smart, 2007. "Raising taxes through equalization," Canadian Journal of Economics, Canadian Economics Association, vol. 40(4), pages 1188-1212, November.
    4. DePeter James A. & Myers Gordon M., 1994. "Strategic Capital Tax Competition: A Pecuniary Externality and a Corrective Device," Journal of Urban Economics, Elsevier, vol. 36(1), pages 66-78, July.
    5. Sotiris Karkalakos & Christos Kotsogiannis, 2007. "A spatial analysis of provincial corporate income tax responses: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 782-811, August.
    6. Leonzio Rizzo, 2008. "Local government responsiveness to federal transfers: theory and evidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(3), pages 316-337, June.
    7. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
    8. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, January.
    9. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    10. Robin Boadway & Michael Keen, 1996. "Efficiency and the optimal direction of federal-state transfers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(2), pages 137-155, May.
    11. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
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    Cited by:

    1. repec:kap:itaxpf:v:24:y:2017:i:5:d:10.1007_s10797-016-9435-y is not listed on IDEAS
    2. Willem Sas, 2015. "Commuting in a federation: Horizontal and vertical tax externalities revisited," ERSA conference papers ersa15p690, European Regional Science Association.
    3. Baskaran, Thushyanthan & Lopes da Fonseca, Mariana, 2013. "The economics and empirics of tax competition: A survey," Center for European, Governance and Economic Development Research Discussion Papers 163, University of Goettingen, Department of Economics.
    4. Jorge Martinez-Vazquez & Cristian Sepulveda, 2012. "Toward a More General Theory of Revenue Assignments," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1231, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    5. Christian Kelders & Marko Koethenbuerger, 2010. "Tax incentives in fiscal federalism: an integrated perspective," Canadian Journal of Economics, Canadian Economics Association, vol. 43(2), pages 683-703, May.
    6. repec:kap:itaxpf:v:24:y:2017:i:4:d:10.1007_s10797-017-9460-5 is not listed on IDEAS
    7. Ogawa, Hikaru & Wang, Wenming, 2016. "Asymmetric tax competition and fiscal equalization in a repeated game setting," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 1-10.
    8. Audun Langørgen, 2015. "A structural approach for analyzing fiscal equalization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(3), pages 376-400, June.
    9. repec:kap:itaxpf:v:25:y:2018:i:2:d:10.1007_s10797-017-9451-6 is not listed on IDEAS
    10. Caterina Liesegang & Marco Runkel, 2016. "Tax Competition and Fiscal Equalization under Corporate Income Taxation," CESifo Working Paper Series 6011, CESifo Group Munich.
    11. Sotiris Karkalakos & Christos Kotsogiannis, 2007. "A spatial analysis of provincial corporate income tax responses: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 782-811, August.

    More about this item

    Keywords

    Federal tax competition; fiscal externalities; equalization grants;

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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