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Vertical income tax externalities and fiscal interdependence: Evidence from the US Model

  • Alejandro Esteller-Moré

    ()

    (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB))

  • Albert Solé-Ollé

    ()

    (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB))

Concurrent taxation is a feature of many federal systems. As a result, the tax policy of one level of government affects the tax base of the other. A way to check the empirical relevance of this hypothesis is to test for the existence of interdependencies in the tax setting behaviour of various layers of government. Following this approach, this paper estimates the reaction of U.S. state personal income and general sales taxes to federal tax rates, taking into account the special features of the U.S. tax system. We find that when the federal government increases taxes, there is a significant positive response of state taxes.

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File URL: http://ieb.ub.edu/aplicacio/fitxers/185792ART92.pdf
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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2000/1.

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Length: 28 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:ieb:wpaper:185792art92
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  1. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
  2. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
  3. Feenberg, Daniel R & Rosen, Harvey S, 1986. "The Interaction of State and Federal Tax Systems: The Impact of State and Local Tax Deductibility," American Economic Review, American Economic Association, vol. 76(2), pages 126-31, May.
  4. Robin Boadway and Michael Keen, . "Efficiency and the Optimal Direction of Federal-State Transfers," Economics Discussion Papers 445, University of Essex, Department of Economics.
  5. Daniel R. Feenberg & Harvey S. Rosen, 1986. "Tax Structure and Public Sector Growth," NBER Working Papers 2020, National Bureau of Economic Research, Inc.
  6. Büttner, Thiess, 1998. "Local Business Taxation and Competition for Capital: The Choice of the Tax Rate," ZEW Discussion Papers 98-43, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Case, Anne C. & Rosen, Harvey S. & Hines, James Jr., 1993. "Budget spillovers and fiscal policy interdependence : Evidence from the states," Journal of Public Economics, Elsevier, vol. 52(3), pages 285-307, October.
  8. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May.
  9. Robert J. Barro & Chaipat Sahasakul, 1983. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," NBER Working Papers 1214, National Bureau of Economic Research, Inc.
  10. Esteller-Moré, Álex & Solé-Ollé, Albert, 1999. "Vertical income tax externalities and fiscal interdependence: evidence from the US," ZEW Discussion Papers 99-28, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  11. Feldstein, Martin S & Metcalf, Gilbert E, 1987. "The Effect of Federal Tax Deductibility on State and Local Taxes and Spending," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 710-36, August.
  12. Arnott, Richard & Grieson, Ronald E., 1981. "Optimal fiscal policy for a state or local government," Journal of Urban Economics, Elsevier, vol. 9(1), pages 23-48, January.
  13. Bordignon, Massimo & Manasse, Paolo & Tabellini, Guido, 1996. "Optimal Regional Redistribution Under Asymmetric Information," CEPR Discussion Papers 1437, C.E.P.R. Discussion Papers.
  14. Besley, Timothy J. & Rosen, Harvey S., 1998. "Vertical externalities in tax setting: evidence from gasoline and cigarettes," Journal of Public Economics, Elsevier, vol. 70(3), pages 383-398, December.
  15. Brueckner, Jan K., 1998. "Testing for Strategic Interaction Among Local Governments: The Case of Growth Controls," Journal of Urban Economics, Elsevier, vol. 44(3), pages 438-467, November.
  16. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
  17. Anne Case, 1993. "Interstate tax competition after TRA86," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 136-148.
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