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Tax mix corners and other kinks

  • Federico Revelli

    ()

    (University of Torino)

This paper models the local tax mix determination process in the presence of state-wide tax limitations and shows how excess sensitivity of local public spending to grants (the conventionally and somewhat misleadingly called flypaper effect) arises in the endogenously generated constrained tax mix and cannot in general be taken as a symptom of local government overspending. By means of a panel data switching regression approach that allows for fixed effects and endogenous selection, the paper exploits the clustering of Italian Provinces at the corners produced by upper and lower tax limitations, and provides evidence of considerable cap-generated excess sensitivity.

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File URL: http://ieb.ub.edu/aplicacio/fitxers/2010/11/Doc2010-50.pdf
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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2010/50.

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Length: 44 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:ieb:wpaper:2010/11/doc2010-50
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