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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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  1. Goodspeed, Timothy J., 1999. "Tax competition and tax structure in open federal economies: evidence from OECD countries with implications for the European Union," ZEW Discussion Papers 99-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Diamond, P., 1994. "Optimal Income Taxation: An Exemple with a U-Shaped Pattern of Optimal Marginal Tax Rates," Working papers 94-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Goodspeed, Timothy J., 2000. "Tax structure in a federation," Journal of Public Economics, Elsevier, vol. 75(3), pages 493-506, March.
  4. Philippe De Donder & Jean Hindriks, 2000. "The Politics of Progressive Income Taxation with Incentive Effects," Working Papers 416, Queen Mary University of London, School of Economics and Finance.
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  8. Robin Boadway and Michael Keen, . "Efficiency and the Optimal Direction of Federal-State Transfers," Economics Discussion Papers 445, University of Essex, Department of Economics.
  9. Gouveia, Miguel & Masia, Neal A, 1998. " Does the Median Voter Model Explain the Size of Government?: Evidence from the States," Public Choice, Springer, vol. 97(1-2), pages 159-77, October.
  10. BOADWAY, Robin & MARCHAND, Maurice & VIGNEAULT, Marianne, 1998. "The consequences of overlapping tax bases for redistribution and public spending in a federation," CORE Discussion Papers 1998003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Roger H. Gordon, 1982. "An Optimal Taxation Approach to Fiscal Federalism," NBER Working Papers 1004, National Bureau of Economic Research, Inc.
  12. Johnson, William R, 1988. "Income Redistribution in a Federal System," American Economic Review, American Economic Association, vol. 78(3), pages 570-73, June.
  13. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
  14. Henning Bohn & Charles Stuart, 2003. "Voting and Nonlinear Taxes in a Stylized Representative Democracy," CESifo Working Paper Series 1058, CESifo Group Munich.
  15. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  16. F. C. Rodrigiuez, 1999. "Does Distributional Skewness Lead to Redistribution? Evidence from the United States," Economics and Politics, Wiley Blackwell, vol. 11(2), pages 171-199, 07.
  17. 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.
  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. 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.
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