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A Positive Model of Overlapping Income Taxation in a Federation of States

  • Esteban Klor

    (W. Allen Wallis Institute of Political Economy, University of Rochester)

This paper develops a positive theory of overlapping income taxation in a federation of states. Its main motivation comes from the observation that in the U.S. states income tax rates are significantly lower than the federal income tax rate. The analysis shows that in a federal system total productivity dispersion between the states determines the federal tax rate. In fact, there exists a positive relation between the level of productivity dispersion and the federal tax rate, even if the income of the decisive voter is above the mean income. When the individuals' income is endogenous, the higher the implemented federal tax rate is, the lower the resulting state tax rate will be, even if the decisive voter at the state level has zero pre-tax income. Empirical evidence obtained from a panel data set on tax schedules at the state level supports the main hypothesis of the paper.

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File URL: http://www.wallis.rochester.edu/WallisPapers/wallis_32.pdf
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Paper provided by University of Rochester - Wallis Institute of Political Economy in its series Wallis Working Papers with number WP32.

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Length: pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:roc:wallis:wp32
Contact details of provider: Postal: University of Rochester, Wallis Institute, Harkness 109B Rochester, New York 14627 U.S.A.

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  13. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, vol. 4(2), pages 163-185, February.
  14. Henning Bohn & Charles Stuart, 2003. "Voting and Nonlinear Taxes in a Stylized Representative Democracy," CESifo Working Paper Series 1058, CESifo Group Munich.
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  16. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
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  18. 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.
  19. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October.
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