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Interjurisdictional tax competition in a federal system of overlapping revenue maximizing governments

Author

Listed:
  • Laurent Flochel

    (GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - ENS LSH - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique)

  • Thierry Madies

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne)

Abstract

Academic literature in public finance has focused on interjurisdictional tax competition-namely among similar types of local governments-but has leaved vertical externalities arising from interactions between two overlapping governments sharing the same tax base aside. The purpose of this paper is to provide a simple model within which interjurisdictional tax competition and vertical interactions between two overlapping governments that share the same tax base can be analyzed simultaneously. We find that interjurisdictional tax competition reduces the global tax rate set by both overlapping governments (federal and local) but is unable to solve completely the distortion arising from vertical externalities. The model is also extended to allow for government subsidies to industrial capital. We give sufficient conditions for capital subsidies to be more efficient to attract capital when they are granted at a federal level rather than at a local level.

Suggested Citation

  • Laurent Flochel & Thierry Madies, 2002. "Interjurisdictional tax competition in a federal system of overlapping revenue maximizing governments," Post-Print hal-02878035, HAL.
    • Handle: RePEc:hal:journl:hal-02878035
    DOI: 10.1023/A:1014695219494
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    Citations

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    Cited by:

    1. William Hoyt, 2005. "The Assignment and Division of the Tax Base in a System of Hierarchical Governments," Working Papers 2005-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    2. Florence Lachet-Touya, 2013. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers hal-02945285, HAL.
    3. Vasilyeva, Olga & Libman, Alexander, 2020. "Varieties of authoritarianism matter: Elite fragmentation, natural resources and economic growth," European Journal of Political Economy, Elsevier, vol. 63(C).
    4. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers hal-02939340, HAL.
    5. William H. Hoyt, 2017. "The assignment and division of the tax base in a system of hierarchical governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(4), pages 678-704, August.
    6. Florence Lachet-Touya, 2009. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers hal-03551027, HAL.
    7. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working papers of CATT hal-02939399, HAL.
    8. Grazzini Lisa & Petretto Alessandro, 2015. "Federalism with Bicameralism," German Economic Review, De Gruyter, vol. 16(2), pages 138-160, May.
    9. Florence Lachet-Touya, 2013. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working papers of CATT hal-02945285, HAL.
    10. Florence Lachet-Touya, 2009. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working papers of CATT hal-03551027, HAL.
    11. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working papers of CATT hal-02939340, HAL.
    12. Alexander Libman, 2012. "Sub-national political regimes and asymmetric fiscal decentralization," Constitutional Political Economy, Springer, vol. 23(4), pages 302-336, December.
    13. Michael Keen & Christos Kotsogiannis, 2003. "Leviathan and Capital Tax Competition in Federations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 177-199, April.
    14. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers hal-02939399, HAL.

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