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Tax Interactions with Asymmetric Information and Nonlinear Instruments

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  • Florence TOUYA

Abstract

When same authorities belonging to a same level of government derive their receipts from a mobile tax base, a competition mechanism takes place among them that triggers externalities. Likewise, when different layers of decision-makers exert their taxing power upon a common base, the choices made by one tier a¤ect the receipts that the other governments can collect. Generally speaking, the decisions made by one government a¤ect the tax revenue that can be collected by the decisionmakers belonging to the same tier of government or by stacked jurisdictions : externalities arise, the existence and the magnitude of which are closely related to the nature of the tax, to the mobility of the base and to the distribution of tax competence among decisionmakers. This paper proposes a model where both horizontal and vertical interactions take place. Uncertainty concerning the base, that is, the amount of capital likely to be invested, is introduced and a generalization of taxation schemes is provided in order to assess the robustness of traditional analyses results in a more general and realistic scheme. The analysis shows that horizontal and vertical externalities point towards opposite directions : while horizontal competition leads to inefficiently low rates, the common pool problem arising from the stacking of decisionmakers taxing a same base gives rise to a phenomenon of over-taxation. The paper aims at finding out whether the combination of both externalities yields higher or lower global tax rates than the one that would emerge in a unique government case. It turns that an excessively high level of taxation emerges. Nevertheless, the vertical tax externality is lessened with respect to the vertical competition case : the global tax rate sets at an intermediary level so that the outcome is brought closer to the social optimum issue.

Suggested Citation

  • Florence TOUYA, 2013. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers 2012-2013_9, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Jul 2013.
  • Handle: RePEc:tac:wpaper:2012-2013_9
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    File URL: http://gtl.univ-pau.fr/travaux/1359F_124571_2012_2013_9DocWcattTax_Interactions_with_Asymmetric__Information_and_Nonlinear_Instruments_FLachetTouya.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Vertical and horizontal tax externalities; Informational asymmetry; Tax competition; Common agency; Nonlinear taxes;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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