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Commuting in a federation: Horizontal and vertical tax externalities revisited

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  • Willem Sas

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Abstract

In this paper, commuting is introduced to a federal economy where benevolent lower-level (state) governments levy an ad valorem tax on labour income. This results in inefficiently low levels of taxation, even when households as a whole do not migrate. Indeed, rather than attracting more workers by lowering taxes, states are out to boost labour supplied by own residents and impede work incentives of non-residents. When the tax base is co-occupied by the federal and state governments secondly, either under- or overtaxation occurs. We find that when taxation is levied ad valorem, undertaxation is more liable to occur than under unit taxation. For the same underlying reasons lastly, fiscal equalisation is expected to give less cause for overtaxation as commonly assumed.

Suggested Citation

  • Willem Sas, 2015. "Commuting in a federation: Horizontal and vertical tax externalities revisited," ERSA conference papers ersa15p690, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa15p690
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    File URL: http://www-sre.wu.ac.at/ersa/ersaconfs/ersa15/e150825aFinal00690.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Commuting; fiscal federalism; tax externalities; tax competition;

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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