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Horizontal and Vertical Tax Interactions in a Common Agency Game

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  • Florence TOUYA

Abstract

The decisions made by one government affect 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. Indeed, 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 affect the receipts that the other governments can collect. As a by-product, this paper proposes a model where both horizontal and vertical interactions are tackled, first successively then simultaneously. Uncertainty concerning the base, that is, the amount of capital likely to be invested, is introduced and a generalization of taxation schemes is provided. 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. Besides, the combination of both externalities yields to an intermediary tax rate: the outcome is brought closer to the social optimum.

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  • Florence TOUYA, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers 2015-2016_12, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
  • Handle: RePEc:tac:wpaper:2015-2016_12
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    Cited by:

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    2. Fabien Candau & Jacques Le Cacheux, 2018. "Taming Tax Competition with a European Corporate Income Tax," Revue d'économie politique, Dalloz, vol. 128(4), pages 575-611.

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    More about this item

    Keywords

    Vertical and horizontal tax externalities; Informational asymmetry; Tax competition; Common agency; Nonlinear taxes;
    All these keywords.

    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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