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Ad Valorem Taxes and the Fiscal Gap in Federations

  • Christos Kotsogiannis

    (Department of Economics, University of Exeter)

  • Diego Martinez

    (Department of Economics, University Pablo Olavide)

This paper investigates the implications of vertical fiscal externalities for the optimal federal tax and the sign of fiscal gap in the presence of ad valorem taxation. It is shown that the federal government can always achieve the second-best optimum for public good provision. The sign of the fiscal gap is, in general, ambiguous. The consequence of this is that a precise evaluation of the fiscal gap requires an explicit consideration of the underlying fundamentals of the federal economy.

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Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0703.

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Date of creation: 2007
Date of revision:
Handle: RePEc:exe:wpaper:0703
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