tax competition in federations and the welfare consequences of decentralization abstract this paper explores the impact of intensified tax competition within federal systems characterized by the presence of both horizontal tax externalities between the states and vertical tax externalities between states and federal government it shows that although these push tax rates in opposite directions horizontal towards state taxes that are too low vertical towards state taxes that are too high leaving the net outcome unclear intensified tax competition always worsens their combined effect that is intensified lower level tax competition in the form of an increase in the number of lower level jurisdictions is sure to reduce welfare but this is not because as usually supposed it makes excessively low state taxes even lower rather it is welfare reducing either for that reason or because it makes excessively high state taxes even higher

interjurisdictional spillovers decentralized policymaking and the elasticity of capital supply a key question in the fiscal federalism literature is whether decentralized policymaking in an economy with spillovers among jurisdictions leads to an efficient outcome see e g oates 1972 a striking example where this question is of particular importance is the current debate on global warming the failure of the copenhagen summit in late 2009 has shown impressively that centralized solutions to the climate change problem are hard to realize one might thus want to know whether a decentralized policy approach where each country chooses its own climate policy without coordinating it with the climate policy of other countries gives hope for an efficient policy outcome further important examples of decentralized decision making in the presence of interjurisdictional spillover effects can be found in the decentralized provision of education and infrastructure at first glance it is hardly imaginable that decentralized policymaking can ever be optimal it is not only the very existence of spillovers that causes doubt the policy instruments themselves also create policy externalities despite this presumption against the efficiency of decentralized policymaking the previous literature provides several studies in which decentralization leads to an undistorted policy choice an important example is the paper of oates and schwab 1988 who argue that the choice of capital taxes in an economy with identical jurisdictions mobile capital and local pollution may indeed be efficient in a remarkable recent paper ogawa and wildasin 2009 extend the analysis to account for transboundary pollution spillovers and asymmetric countries and still get the efficiency result in their model emissions and thus the extent of spillovers generated by a jurisdiction is proportional to capital employed in this jurisdiction the choice of capital taxes is then distorted by the jurisdictions incentives for tax competition and by the jurisdictions disregard of spillover effects but the key argument is that both distortions just neutralize each other and thereby lead to efficient capital tax rates our paper contributes to this literature and points to the important role that the elasticity of aggregate capital supply with respect to the net rate of return to capital plays for the efficiency of decentralized policymaking in accordance with the previous literature we show that under a fixed capital supply zero capital supply elasticity the decentralized policy choice is indeed optimal if the capital supply elasticity is strictly positive however capital tax rates are inefficiently low in the decentralized

ad valorem taxation and the balance of externalities in federations abstract this paper shows that in contrast to unit taxation horizontal and vertical externalities that exist in federations are ambiguous in sign when taxation is ad valorem their balance however depends on the marginal valuation of lower level government and federal public goods

foreign direct investment and the dark side of decentralization countries differ in their government architecture some countries are characterized by a high degree of concentration of fiscal administrative judicial executive and lawmaking powers whereas others have decentralized many functions and responsibilities of government to different jurisdictions and various levels of government the cross country differences in the organization of government are also not static but have been subject to substantial change in many countries the co existence of different organizational patterns of government has created an important debate regarding the determinants of particular government structures as well as questions regarding the optimality of different forms of organization

reassessment of the tiebout model abstract the tiebout model has been the reference point for the classical approach to fiscal federalism its emphasis on mobility benefit taxation and the advantages of fiscal competition have informed fiscal federalism since the seminal contributions of musgrave and oates this paper reviews the influence that the tiebout model has had on fiscal federalism and argues that while its insights remain relevant for local government it is far from compelling as a positive description of or a normative prescription for fiscal federalism at the state level some aspects of alternative approaches are presented which lead to different perspectives than tiebout inspired ones

does tax competition soften regional budget constraint this paper analyses the impact of both horizontal and vertical tax competition on central government transfers towards regions as well as on the softness of the regional budget constraint we show that tax interactions have no impact on the optimal central government grant whereas they harden the regional budget constraint when the regional debt is not too heavy

fiscal federalism and lobbying abstract which government functions should be decentralized resp centralized once lobbying behavior is taken into account we find that the answer largely depends on how the interests of the regional lobbies are positioned with respect to the function to be decentralized resp centralized when regional lobbies have conflicting interests then lobbying is less damaging for social welfare under centralization than under decentralization on the contrary when regional lobbies have aligned interests then lobbying is less damaging for social welfare under decentralization provided that policy spillovers on the non organized groups are not too strong

public good differentiation and the intensity of tax competition we show that in a setting where tax competition promotes efficiency variation in the extent to which firms can use public goods to reduce costs brings about a reduction in the intensity of tax competition this in turn brings about a loss of efficiency in this environment a minimum tax counters the reduction in the intensity of tax competition thereby enhancing efficiency split the difference tax harmonization also potentially enhances efficiency but would not be agreed upon by governments because it lowers the payoff to at least one of them this paper also presents an explanation for how traditionally high tax countries have continued to set taxes at a relatively high rate even as markets have become more integrated

on production efficiency in federal systems abstract this paper emphasises the role of the allocation of rents between the levels of government within a federal economy in the achievement of production efficiency it is shown that in a federal economy in the absence of vertical transfers production efficiency dictates rents should be allocated to the upper federal level of government

does fiscal cooperation increase local tax rates in urban areas charlot s paty s and piguet v does fiscal cooperation increase local tax rates in urban areas regional studies the main purpose of this paper is to assess the effects of fiscal cooperation on local taxation in a decentralized country using experience in french urban municipalities a tax setting model for local business tax is estimated using spatial and panel econometric techniques for the period 1993 2003 controlling for population size it is found that fiscal cooperation is likely to reduce tax competition and as a consequence to increase local business tax rates

corporate benefit policies and health insurance costs we tested the hypothesis that health insurance premium costs per employee are lower for employee groups where multiple health plans are offered and the employer pays a level dollar amount of the chosen premium than for employee groups where these two conditions are not met proposed national legislation relies on these conditions to create a competitive health care market data on 56 employee groups in 1981 and 66 employee groups in 1982 were collected from two surveys of large employers in minnesota regression analysis of premium data from both surveys rejected the hypothesis indemnity plans in multiplan groups were cheaper if the employer paid a level dollar contribution versus a level percent including 100 contribution however groups offered only an indemnity plan had lower premiums than groups meeting the two legislative conditions these findings apply to both individual and family coverage premiums and are not caused by systematic differences in benefit provisions employee demographics or factors influencing loading charges our findings cast doubt on attempts to achieve health care competition by legislative changes in insurance options and contribution methods

decentralized income redistribution reconsidered decentralized income redistribution reconsidered i introduction which is the appropriate level of government to undertake income redistribution this issue is receiving renewed attention from economists examining how migration and labor supply responses affect the costs of transfer payments at the state or federal level in a recent paper brown and oates 1987 use a formal public choice model to show that the possibility of migration of transfer recipients between states leads to suboptimal transfer levels even when taxpayers care only about transfer recipients within their own states with benefit spillovers across states their argument for federal responsibility for redistribution is presumably even stronger gramlich 1985 also argues that migration is large enough to lead to suboptimal levels of transfers at the state level because states with low benefit levels will be able to export their poor increasing the cost of redistribution to high benefit states gramlich s conclusion is based on the empirical work in gramlich and laren which finds that the migration effect is very strong though only in the very long run 1984 510 the implicit argument is that migration raises the cost of redistribution at the state level compared to the federal level 1 however neither brown and oates nor gramlich consider labor supply responses that is hours and participation in their analyses on the other hand several recent papers have attempted to estimate the cost of redistribution at the national level incorporating labor supply responses to taxes and transfers but not interjurisdictional migration 2 some empirical evidence is available which is consistent with either migration or labor supply effects for example helms 1985 uses time series cross section data on state expenditure and tax policies and finds that while spending on public services schools highways etc increases personal income increased state transfer payments financed by state taxes significantly reduce total state personal income this reduction could be caused by either migration or labor supply responses to taxes and transfers indeed helms s estimates indicate a very large response to transfer spending one more dollar of transfers reduces state personal income in the long run by 14 83 helms concludes states which seek to devote substantial tax revenues to transfer payments will experience significantly reduced growth prospects which limits the scope for redistribution at the state and local levels 1985 581 a concise summary of the standard argument concerning federalism and redistribution might be as follows 1 interstate migration of taxpayers and transfer recipients raises the taxpayer cost of income redistribution at the state level above the cost at the federal level 2 state wide redistribution confers spillover benefits to residents of other states 3 therefore as compared with a national system decentralized responsibility for income redistribution yields a less redistribution because its cost is higher and b less than the socially optimal amount of redistribution because of externalities my 1988 paper shows that step 1 of the above argument is not necessarily true because the migration effect which previous authors have stressed can be offset by a tax exporting effect by which residents of one state shift some of the fiscal cost of redistribution to residents of other states both the income effect and the substitution effect of increased redistribution will reduce the labor supply and hence earnings of transfer recipients the labor supply and earnings of taxpayers may also fall if substitution effects are strong enough the tax exporting effect arises if taxes and transfers on net reduce total earnings in a state since the state s federal tax obligations depend on its earnings

an empirical analysis of intergovernmental tax interaction the case of business income taxes in canada both federal and provincial governments in canada levy corporate taxes on busi nesses in their jurisdictions which potentially gives rise to horizontal and vertical tax exter nalities within the federation using a simple model of interdependent tax choices we estimate tax setting functions for the federal government ontario quebec and an aggregate of the remaining eight provinces we find evidence of significant vertical and horizontal tax inter actions provincial tax rates respond negatively to the federal tax rate while at least some provinces increase their tax rates in response to increases in the tax rates of other provinces

heterogeneous vertical tax externalities and macroeconomic effects of federal tax changes the role of fiscal advantage abstract how do state tax rates respond to federal tax shocks this paper presents a novel mechanism of heterogeneous vertical tax externalities across state levels of fiscal advantage showing that tax increases can be expansionary even without their reinvestment states rich in natural resources have a fiscal advantage in the inter state competition over production factors which allows them to respond better to increases in federal taxes and consequently attract capital from other parts of the nation we add heterogeneity in fiscal advantage levels to an otherwise standard model of vertical tax externalities and horizontal tax competition the model shows that irrespective of federal redistribution the contractionary effect of a federal tax increase can be overturned in fiscally advantaged states through an increase in their tax base using the case of the u s and narrative based measures of federal tax shocks a la romer and romer 2010 we provide empirical evidence for the various aspects of this mechanism specifically our baseline estimates indicate that controlling for federal transfers a 1 increase in the gdp share of capital related federal taxes at the beginning of a year increases the growth rate of the per capita tax base by approximately 0 7 in high fiscal advantage states at the end of it

a theory of interregional tax competition a general equilibrium model is constructed to study tax competition where local governments compete for capital by holding down property tax rates and public expenditure levels an exact definition of tax competition is provided and both the existence and nonexistence of tax competition are shown to be theoretically possible it is argued however that tax competition must occur under empirically reasonable conditions inefficiency in public production is also explicitly modeled the amount of capital used to produce a given level of public service output is shown to be greater than that which is required to minimize costs evaluated at the prices facing private firms

vertical externalities in cigarette taxation do tax revenues go up in smoke abstract in federal systems where tax bases are joint property the tax policy of one level of government affects the tax base of the other this paper examines the interdependence of us federal and state cigarette tax rates our results suggest that states may reduce their cigarette tax rate by as much as 48 cents per dollar increase in the federal tax rate thus a federal tax hike may reduce the amount of generated state tax revenues both directly the overall tax rate rises and the state tax base declines and indirectly the state tax rate declines

from theory to practice canadian economists contributions to public finance we survey canadian economists contributions to the field of public finance from the mid 1980s to 2016 we highlight the development and extension of the models and tools of public economics and the empirical studies that have deepened our understanding of the efficiency and distributional issues over a wide range of public finance issues we also highlight contributions to the development of policies through commissioned reports and the important role that canadian institutions the canadian tax foundation the think tanks and the federal and provincial departments of finance have played in shaping tax and fiscal policies de la theorie a la pratique contributions des economistes canadiens a la finance publique on examine les contributions des economistes canadiens au domaine de la finance publique du milieu des annees 1980 a 2016 on souligne le developpement et l extension des modeles et des outils d economie publique et les etudes empiriques qui ont aide a approfondir notre comprehension des enjeux d efficacite et de distribution dans un vaste eventail de questions de finance publique on souligne aussi les contributions des rapports commandites au developpement de politiques publiques ainsi que le role important d institutions canadiennes l association canadienne d etudes fiscales les groupes d experts ainsi que les ministeres des finances du gouvernement federal et des gouvernements provinciaux dans le design des politiques fiscales

tax competition in federations revisited we extend keen and kotsogiannis 2002 2004 by considering all purpose public goods that are beneficial to both producers and consumers horizontal externality resp vertical externality exerted by tax competition will not necessarily lead to inefficient outcomes

taxes intermediate goods and relative prices the case of variable coefficients abstract price effects of an output tax in sector 1 and an equivalent production subsidy in the second industry are analyzed in a general equilibrium model each commodity satisfies final demand and uses two primary inputs and the other good as an intermediate product production coefficients are variable and demand is elastic in a leontief model with fixed coefficients metzler showed that price of the taxed good will rise and price of the subsidized good will fall this result generally holds under less restrictive conditions also although it is sometimes reversed how the topic relates to the tax incidence literature is also discussed

rate of return regulation and two part tariffs in choosing a two part tariff a monopoly subject to rate of return regulation will rely more on demand elasticities and less on marginal costs than would a welfare maximizing firm the rate of return regulated firm also will reduce its access fee or its marginal usage fee more depending on whether adding consumers or increasing output requires marginally the most capital in the typical case these effects will favor declining block rate structures which helps to explain their widespread use by rate of return regulated firms

how responsive is business capital formation to its user cost an exploration with micro data abstract the response of business capital formation to its user cost is critical to evaluating tax reform deficit reduction and monetary policy evidence for a substantial user cost elasticity however is sparse most evidence has been based on aggregate data although several recent studies with firm level data report substantial effects with a particularly rich micro dataset containing over 26 000 observations this paper explores what can be learned about the user cost elasticity while the results depend to some extent on the specification and econometric technique various diagnostics lead us to prefer a precisely estimated but small elasticity of approximately 0 25 this paper is dedicated to the memory of robert eisner who labored early and ably on uncovering the determinants of investment spending and highlighting the importance of the question found in the title of this paper

coupled economic ecological systems with slow and fast dynamics modelling and analysis method the purpose of this article is to contribute to the exploration of non convex dynamics in coupled human nature systems we study welfare issues associated with the management of a human nature complex adaptive system with a threshold and a stochastic driver we exemplify with a specific system where we link changes in the number and diversity of birds to the abundance of a pest insects that causes damages to goods and services valuable to human beings we present a method that simplifies the analysis and helps us discuss different management models that combine direct and indirect controls of the pest this allows us to show that 1 the choice of control method depends in a highly non linear way on biodiversity characteristics and 2 the socially optimal outcome may not be reachable using price instruments hence the price vs quantity debate needs to be revisited using a complex adaptive system lens

tax structure in a federation abstract does national taxation of a base influence the degree to which the local government will use the same tax base does the tax rate chosen by one local government influence the choices made by another local government the theoretical answer to these questions is often in the affirmative because of vertical and horizontal externalities that result when several governments are operating at the same time in a fiscal system however little empirical information is available this paper estimates the impact of horizontal and vertical externalities on the choice of tax rates by local governments operating in a federation higher national income tax rates and lower poverty rates are found to lead to lower local income tax rates

intermediate goods and the incidence of the corporation income tax abstract intermediate goods are introduced into a general equilibrium model of the incidence of the corporation income tax several theoretical conclusions about the role of such goods are established many well known propositions about the incidence of the corporation income tax emanating from models with only final goods need to be modified estimates from u s data suggest that if intermediate goods are left out results will be misleading especially if these goods are a relatively large sector in the economy and possibilities of substituting capital for labor in their production and of substituting them for other productive factors in the final good industries are rather limited

a spatial analysis of provincial corporate income tax responses evidence from canada using a model of interdependent tax choices and accounting for equalization entitlements and general transfers this paper estimates making use of a spatial econometric framework corporate income tax setting functions for all canadian provincial governments the results show that there is a statistically significant positive fiscal interaction among a subset of provinces and between all provinces and the federal government provincial corporate income taxes are also found to be negatively related to equalization entitlements general federal transfers and the federal corporate income tax a robustness check on the fiscal relationship between ontario and quebec verifies the existence of significant bi directional fiscal interdependencies the paper also introduces u s state corporate income taxes as covariates and examines their interaction with canadian provinces a l aide d un modele de choix fiscaux interdependants et en tenant compte des paiements de perequation et des transferts generaux ce texte calibre a l aide d un cadre econometrique spatial les fonctions de definition de fiscalite des revenus de societes de tous les gouvernements provinciaux canadiens les resultats montrent qu il y a un effet d interaction positif significatif entre un sous ensemble de provinces et entre les provinces dans leur ensemble et le gouvernement federal les impots sur le revenu des societes des provinces sont co relies negativement avec les paiements de perequation les transferts generaux et l impot federal sur le revenu des societes des tests de robustesse montrent qu il y a relation d interdependance fiscale bidirectionnelle significative entre le quebec et l ontario le memoire introduit les impots sur le revenu des societes aux etats unis comme co variables et examine leur interaction avec ce qui se passe dans les provinces canadiennes

capital taxation and production efficiency in an open economy we attempt to clarify the role of the production efficiency theorem in international capital taxation it is shown that a direct open economy analogue to the production efficiency theorem arises not in the small country case but in the more general setting of tax competition between a finite number of identical jurisdictions

does tax competition tame the leviathan abstract we study the impact of tax competition on equilibrium taxes and welfare focusing on the jurisdictional fragmentation of federations in a representative agent model of fiscal federalism fragmentation among jurisdictions with benevolent tax setting authorities unambiguously reduces welfare if however tax setting authorities pursue revenue maximization fragmentation by pushing down equilibrium tax rates may under certain conditions increase citizen welfare we exploit the highly decentralized and heterogeneous swiss fiscal system as a laboratory for the estimation of these effects while for purely direct democratic jurisdictions which we associate with relatively benevolent tax setting we find that tax rates increase in fragmentation fragmentation has a moderating effect on the tax rates of jurisdictions with some degree of delegated government our results thereby support the view that tax competition can be second best welfare improving by constraining the scope for public sector revenue maximization

mergers in fiscal federalism this paper analyzes mergers of regions in a two tier setting with both horizontal and vertical tax competition the merger of regions induces three eects on regional and local tax policies which are transmitted both horizontally and vertically i an alleviation of tax competition at the regional level ii a rise in the regional tax base and iii a larger internalization of tax externalities generated by cities it is shown that the merger of regions increases regional tax rates while decreasing local tax rates this nash equilibrium with mergers is then compared with the nash equilibrium with coalitions of regions

decentralized taxation and the size of government evidence from swiss state and local governments according to the leviathan model fiscal federalism is seen as a binding constraint on a revenue maximizing government the competitive pressure of fiscal federalism is supposed to reduce public sector size as compared to unitary states however empirical results concerning the leviathan hypothesis are mixed this study uses a state and local level panel data set of swiss cantons from 1980 to 1998 to empirically analyze the effect of different federalist institutions on the size and structure of government revenue because of the considerable tax autonomy of sub national swiss governments it is possible to investigate different mechanisms by which fiscal federalism may influence government size the results indicate that tax exporting has a revenue expanding effect whereas tax competition favors a smaller size of government fragmentation has essentially no effect on the size of government revenue for swiss cantons the overall effect of revenue decentralization leads to fewer tax revenue but higher user charges thus revenue decentralization favors a smaller size of government revenue and shifts government revenue from taxes to user charges

political decentralization and corruption evidence from around the world abstract how does political decentralization affect the frequency and costliness of bribe extraction by corrupt officials previous empirical studies using subjective indexes of perceived corruption and mostly fiscal indicators of decentralization have suggested conflicting conclusions in search of more precise findings we combine and explore two new data sources an original cross national data set on particular types of decentralization and the results of a firm level survey conducted in 80 countries about firms concrete experiences with bribery in countries with a larger number of government or administrative tiers and given local revenues a larger number of local public employees reported bribery was more frequent when local or central governments received a larger share of gdp in revenue bribery was less frequent overall the results suggest the danger of uncoordinated rent seeking as government structures become more complex

interjurisdictional capital mobility fiscal externality and a corrective subsidy abstract recent studies emphasize that local property taxation may result in inefficiently small amounts of local public spending this paper shows that the inefficiency can be traced to a fiscal externality when one jurisdiction increases its taxes it causes a flow of capital to other jurisdictions that increases their tax revenues the inefficiency can be corrected with a subsidy that internalizes the externality key empirical parameters determining the magnitude of the externality are identified illustrative calculations indicate that subsidy rates on the order of 40 might be required to achieve efficiency

the impressive contribution of canadian economists to fiscal federalism theory and policy the study of fiscal federalism has been central to the research of canadian economists since the rowell sirois report to mark the 50th anniversary of the founding of the canadian economics association it is fitting to take stock of their contributions we focus on the period since 1982 and emphasize the main scholarly publications of an inclusive array of canadian economists and economists in canadian universities our attention is devoted to applications in the context of federal and provincial governments setting aside related issues in municipal government finance we briefly discuss instances where the fiscal federalism literature has informed policy debates including through policy research institutes government commissions and international organizations la contribution impressionnante des economistes canadiens a la theorie et a la politique du federalisme fiscal l etude du federalisme fiscal a ete un element central de la recherche des economistes canadiens depuis la commission rowell sirois au moment de celebrer le 50eme anniversaire de la fondation de l association canadienne d economique le moment est approprie pour prendre la mesure de leurs contributions on se concentre sur la periode apres 1982 et on souligne les principales publications savantes d un ensemble inclusif d economistes canadiens et d economistes dans les universites canadiennes une attention particuliere est portee aux applications dans le contexte federal et provincial mettant de cote les enjeux relies a la finance municipale on discute brievement des instances ou la litterature sur le federalisme fiscal a eclaire les debats de politiques publiques y compris a travers les instituts de recherche sur les politiques publiques les commissions gouvernementales et les organisations internationales

capital tax competition under a common currency abstract we re examine the view that capital taxes are too low when capital is mobile across tax jurisdictions we do so by emphasising a previously neglected implication of decentralised capital tax setting when jurisdictions share a common currency namely capital taxes give rise to a vertical externality by affecting the revenues of the over arching central bank from issuing the common currency this externality may lead ceteris paribus to too high regional capital taxes and may more than offset the usual effects of tax competition in this case and contrary to conventional wisdom decentralised capital taxes will be too high

the consequences of overlapping tax bases for redistribution and public spending in a federation tax and expenditure policies are studied in a federation with imperfectly mobile households states implement a linear progressive tax and supply a public good a vertical fiscal externality reflecting the effect of state policies on federal revenues provides an incentive for state taxes to be too progressive a horizontal fiscal externality causes nonoptimal state taxes and expenditures because of the migration effect the federal government implements its own linear progressive tax and makes transfers to the states the federal government can nullify both externalities by appropriate fiscal policies and redistributive taxation can be decentralized to the states c 1998 elsevier science s a

taxes and subsidies in the input output model this paper reexamines metzler s analysis of the effects of taxes and subsidies on the competitive supply prices of output in leontiefs system it will be shown that metzler s conclusions are valid even if one removes the assumptions made by metzler and that allen s conclusion concerning the ad valorem tax is false we present some interesting properties of leontiefs system and also provide a theorem on metzler s matrix proving it and deriving some useful properties on the inverse matrix of the input output model

does federalism lead to excessively high taxes the relative strengths of vertical and horizontal tax externalities turn on the balance between the interest responsiveness of the supply of savings and demand for capital the extent to which immobile factors are taxed by the states and the strength of preferences between federal and state expenditures the vertical externality will dominate if the aggregate tax base of the federation is responsible to the state tax instrument tax interactions in federations are more complex than has often been supposed

employee choice of health insurance a new specification of health insurance plan choice is developed that uses a nonparametric functional form for the loss function used to evaluate insurance premiums and uncertain out of pocket expenditure the approach is implemented on data resulting from one firm s implementation of a new health plan with three distinct health insurance options health expenditure differences greater than 500 percent are observed indicating extremely strong biased selection plan choices are consistent with a convex loss function for small losses which suggests that consumers underweight high loss low probability outcomes relative to low loss high probability ones copyright 1989 by mit press

income redistribution in a federal system the question of the appropriate level of government to undertake income redistribution is receiving renewed attention from economists the standard argument about the issue might be summarized as follows 1 interstate migration of taxpayers and transfer recipients raises the cost to voters of income redistribution at the state level above the cost at the federal level 2 statewide redistribution confers spillover benefits to residents of other states 3 therefore as compared with a national system decentralized responsibility for income redistribution yields both less redistribution and less than the socially optimal amount of income redistribution the purpose of this paper is only to question step 1 of the above argument of course readers who accept the assumptions of the standard argument may conclude that the possible weakening of step 1 of that argument reduces the likelihood that its conclusion holds the paper argues that the cost of redistribution faced by state residents may in fact be lower at the state level than at the national level because their federal tax obligations fall as the state redistributes more income thus part of the cost of redistribution at the state level can be exported to residents of other states the state s federal tax bill falls when taxable incomes in the state are reduced by increased redistribution deductibility of state taxes enhances this result but is not necessary for it to demonstrate the proposition without adding unnecessary complication a simple model of income redistribution is described in which governments at all levels use linear tax transfer schedules to redistribute income the single government case is considered first then two levels of government are introduced and finally migration is allowed it is shown that without migration state costs are never greater than national costs of redistribution as long as redistribution reduces total money income when migration is allowed the result depends on the elasticity of migration responses compared with the elasticity of labor supply responses

value added tax and the theory of tax incidence abstract a value added tax is examined in a general equilibrium model of tax incidence incorporating primary factors and intermediate goods production coefficients are variable and demand is elastic the principal result is that under assumptions of fixed coefficients and inelastic demand which have been commonly employed in the literature vat as well as the corporation income tax will be neutral in the more general setting of this paper only vat applied to every industry at equal rates will not affect relative factor and commodity prices incidence and other economic effects of a partial vat are also discussed

horizontal and vertical indirect tax competition theory and some evidence from the usa this paper provides a simple theoretical framework for analysing simultaneous vertical and horizontal competition in excise taxes and estimates equations informed by the theory on a panel of us state and federal excise taxes on cigarettes and gasoline we also examine the role played by smuggling the results are generally consistent with the theory when the characteristics of the markets for the goods are taken into account for neither good do federal excise taxes affect state taxes taxes in neighbouring states have a significant and large effect in the case of cigarettes and a much weaker effect in the case of gasoline we also find that in the setting of cigarette taxes concerns about cross border shopping play a more important role than concerns about smuggling

local fiscal competition an application to sales taxation with multiple federations abstract local sales tax rates influence the location of retail activity this paper develops a theory and empirical identification strategy for studying sales tax competition with multiple federations as exemplified by multiple counties each containing several cities in addition to strategic interactions with nearby cities and a city s own county city tax rates are influenced by the tax rates of neighboring counties cities react heterogeneously to own county sales tax rates depending on distance to the county border using data on the driving time to county borders and a comprehensive cross section of local sales tax rates i exploit variation in proximity to county borders to identify vertical fiscal competition cities located near county borders react more intensely to their county s tax rate in comparison to towns at the interior an increase in the neighboring county tax rate raises city tax rates in nearby counties

the economics of split ticket voting in representative democracies in u s elections voters often vote for candidates from different parties for president and congress voters also express dissatisfaction with the performance of congress as a whole and satisfaction with their own representative the authors develop a model of split ticket voting in which government spending is financed by uniform taxes the benefits from this spending are concentrated while the model generates split ticket voting overall spending is too high only if the president s powers are limited overall spending is too high in a parliamentary system the authors model can be used as the basis of an argument for term limits copyright 1997 by american economic association

reforming an asymmetric union on the virtues of dual tier capital taxation the tax competition for mobile capital in particular the reluctance of small countries to agree on measures of tax coordination has ongoing political and economic fallouts within europe we analyse the effects of introducing a two tier structure of capital taxation where the asymmetric member states of a union choose a common federal tax rate in the first stage and then non cooperatively set local tax rates in the second stage we show that this mechanism effectively reduces competition for mobile capital between the members of the union moreover it distributes the gains across the heterogeneous states in a way that yields a strict pareto improvement over a one tier system of purely local tax choices we also discuss the effects of diverging capital endowments within the union and capital flows to third countries

state and local tax competition in a spatial model with sales taxes and residential property taxes abstract this paper presents a theoretical model with a uniformly populated line that is divided into local jurisdictions and or states if one level of government imposes sales and residential property taxes and if the spatial extent of each taxing jurisdiction is positive and finite then in nash equilibrium the sales tax rate is less than residential property tax rate housing consumption is suboptimal and the public good is underprovided in each jurisdiction if a very large state or country is divided into local jurisdictions and if both levels of government choose tax rates endogenously then under some assumptions there is an efficient outcome

the effect of premiums on the small firm s decision to offer health insurance many small firms fewer than 50 employees do not offer health insurance we investigated the role of premiums in the small firm s decision to offer health insurance using data from a 1993 survey of 2 000 small firms in minnesota selectively corrected equations were estimated to predict the premiums faced by firms offering and not offering insurance the elasticity of demand for health insurance calculated at the mean of the data was 3 91 for single coverage and 5 82 for family coverage we contrast these results to the much lower responsiveness found in experimental studies and suggest that our findings are more likely to model the small firm s demand for health insurance

vertical fiscal externalities in a federation abstract we examine vertical fiscal externalities in a model where a state government provides a productivity enhancing public input and both the state and the central government tax wages and profits previous literature has emphasized the negative tax externality that occurs when two levels of government impose distortionary taxes on the same tax base we show that an increase in the state government s tax rate on wage income can increase federal revenues if the federal government imposes an ad valorem tax on employees wages and the demand for labour is inelastic we also show that an increase in the provision of the public input can either increase or reduce federal tax revenues leading to either under or over provision of the public input by the state government

vertical versus horizontal tax externalities an empirical test abstract we study taxation externalities in federations of benevolent governments where different hierarchical government levels tax the same base one can observe two types of externalities a horizontal externality working among governments of the same level and leading to tax rates that are too low compared to the social optimum and a vertical externality working between different levels of government and leading to suboptimally high tax rates building on the model of keen and kotsogiannis keen michael j kotsogiannis christos 2002 does federalism lead to excessively high taxes american economic review 92 1 363 370 we derive a discriminating hypothesis to distinguish vertical and horizontal tax externalities based on measurable variables this test is applied to a panel data set on local taxes in a sample of swiss municipalities that feature direct democratic fiscal decision making so as to maximize the correspondence with the benevolent governments of the theory we find that vertical externalities dominate they are thus an observed empirical phenomenon as well as a notable extension to the theory of tax competition

vertical fiscal externalities and the environment we show that imposition of a state level environmental tax in a federation crowds out pre existing federal taxes we explain how this vertical fiscal externality can lead unilateral state level environmental policy to generate a welfare gain in the implementing state at the expense of other states even absent any environmental benefits using a computable general equilibrium model of the canadian federation we show that vertical fiscal externalities can be the major determinant of the welfare change following environmental policy implementation by a state government our numerical simulations indicate that as a consequence of vertical fiscal externalities state governments can reduce greenhouse gas emissions by over 20 percent without any net cost to themselves

the deductibility of provincial business taxes in a federation with vertical fiscal externalities should provincial business taxes be deductible under a federal profit tax we show that the optimal deductible which neutralizes the vertical fiscal externality between the federal and provincial government is the change in the federal tax base per dollar of tax revenue collected by the provincial government the optimal payroll tax deductibility rate depends on the extent to which it is shifted to workers and on the difference between the federal tax rates on profits and on labour income two apparently contradictory positions full deductibility of a payroll tax and non deductibility are special cases of our model la deductibilite des taxes provinciales imposees aux entreprises dans une federation ou il y a des externalites fiscales verticales est ce que les taxes provinciales imposees aux entreprises devraient etre deductibles de l impot federal sur les profits les auteurs montrent que l optimum de deductibilite qui neutralise les externalites fiscales verticales entre le federal et les provinces est le changement dans la base d imposition federale par dollar de revenu fiscal collecte par le gouvernement provincial le taux de deductibilite optimal d un impot sur les salaires depend de la portion du fardeau fiscal qui est deportee vers les travailleurs et de la difference entre les taux d imposition du federal sur les profits et sur le revenu du travail deux positions apparemment contradictoires pleine deductibilite d un impot sur les salaires et deductibilite nulle sont des cas speciaux du modele general

social accounting and the public sector this article contributes to the theory of social accounting as such it tries to extend earlier literature on the welfare equivalence of the comprehensive net national product in two main directions both of which refer to the public sector one is by considering welfare measurement problems associated with public good provision and redistributive policy respectively when the public revenues are raised by distortionary taxes the other is by addressing the consequences of a federation like decision structure where independent tax and expenditure decisions are made both by the central government and by lower level governments

efficiency in employment based health insurance the potential for supra marginal cost pricing currently the majority if privately insured individuals in the u s are insured through their employers this has significant implications for competition and the ability qf a competitive insurance industry to assure marginal cost pricing the central barrier to competition arises when employers restrict their employees ability to select among insurance carriers several models 4 insurer proft maximization are explored which demonstrate that supra marginal cost pricing is likely to persist euen when the insurance market appears cornpetitiue

vertical tax competition in brazil empirical evidence for icms and ipi in the period 1995 2009 abstract the main objective of this study is to quantify the impact caused by changes in federal tax on the tax policy of the brazilian states considering the presence of horizontal tax competition between states using panel data covering 26 brazilian states plus the federal district during the period 1995 2009 two models were estimated representing the average reaction of the states in response to changes in federal tax rates in the first model both levels of government act simultaneously whereas in the second model reaction is sequential with the federal government acting as the leader in defining its effective tax rates the results indicate a positive and significant response of states to increases in the federal tax rate resulting in an over taxation of the common tax base and higher tax rates additional tests show that the first model is the most suitable to represent the problem analysed

commodity tax competition between member states of a federation equilibrium and efficiency we first describe regional market equilibria whereupon consumers of each region allocate their purchases of private goods between domestic and nondomestic ones according to the structure of relative prices taxes and transportation costs next regional optimal tax levels and public good quantities are derived the tax of the other region being held constant fiscal competition arises from the ability of one region in choosing its tax to alter the tax base of the other

scotland and small country independence the assessment this paper reviews some of the issues consequent on the formation of new states through secession while its particular focus relates to the potential withdrawal of scotland from the united kingdom it discusses preference heterogeneity as a potential cause of the break up of states relating that to recent developments in the economics of identity it examines some macroeconomic issues particularly debt and currency and reflects on how these might influence secession it examines alternatives fiscal decentralization to secession and considers the strategies that those arguing for and against secession may deploy it also explains the structure of this issue explaining how the different contributions come together

decentralization and fuel subsidies abstract this paper explores the role of decentralization in explaining variation in fuel subsidies across countries using panel data over the period 1998 2008 and for 108 countries it emerges that the effect of decentralization taken to be an increase in the number of government levels broadly decreases both diesel and gasoline subsidies with this effect being more pronounced when the level of political accountability is low for developing countries for which political accountability is low decentralization decreases gasoline and diesel subsidies by at least 6 98 and 12 99 respectively for developed countries for which political accountability is high decentralization does not have any impact on both gasoline and diesel what this evidence points to is that in developing economies where voters are poorly informed and accountability is low decentralization appears to be associated with lower fuel subsidies

exemption versus zero rating a hidden problem of vat abstract we examine the difference between exemptions and zero rating under a consumption based vat in a numerical general equilibrium model to allow for a better understanding of the accruing efficiency effects we first develop a method to convert the nominal vat rates into effective tax rates on categories of final demand then we show how these effective tax rates can be used to perform a gradual transition from exemption to zero rating

vertical tax externalities and the composition of public spending in a federation abstract dividing tax power between different levels of government in a federation is shown to lead not only to overtaxation but also distorts the composition of state and federal public spending

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

how large are the welfare costs of tax competition abstract competition among regional governments may lead to suboptimal levels of capital taxation as governments ignore the external benefits of capital flight to other regions however there have been few attempts to quantify the magnitude of the resulting efficiency losses this paper presents extensive calculations of the efficiency costs over a wide range of parameter scenarios and assumptions about government behavior using various generalizations of wildasin journal of urban economics 25 1989 193 213 the efficiency costs tend to be fairly moderate under most though not all scenarios and particularly when allowance is made for the possibility of leviathan and non competitive government behavior

fiscal federalism revisited abstract we analyze how constitutional restrictions on tax bases within a federation affect the nature of pareto improving directions of tax reform and the design of optimal federal taxes we show that constraints on federal taxation entail production inefficiency at the optimum except under very restrictive circumstances in passing we show that using consumer prices as control variables a standard procedure in tax reform analysis rather than the taxes themselves leads to incorrect conclusions when not all taxes or prices can be controlled journal of economic literature classification numbers d61 h21 h70

misaligned incentives and the scale of incarceration in the united states abstract the incarceration rate has increased substantially in the united states between the 1980s and the 2000s in this paper i explore an institutional explanation for this growth the fact that costs of incarceration are not fully internalized typically prison is paid for at the state level but county employees such as judges prosecutors or probation officers determine time spent in custody i exploit a natural experiment that shifted the cost burden of juvenile incarceration from state to counties keeping overall costs and responsibilities unchanged this resulted in a stark drop in incarceration and no increase in arrests suggesting an over use of prison when costs are not internalized the large magnitude of the change suggests that misaligned incentives in criminal justice may be a significant contributor to the current levels of incarceration in the united states

pricing behavior of the budget constrained public enterprise abstract by assuming that a budget constrained multiproduct public enterprise chooses prices with the goal of maximizing its budget its revenue or its output specific pricing rules can be derived rather than overstating demand elasticities and then pricing like a monopolist as a budget constrained welfare maximizing firm would do the enterprise pursuing one of these alternative goals is shown to understate marginal cost and then price like a monopolist non optimal price discrimination and even cross subsidization may result the outcome tends to be more perverse when statutory entry barriers protect some markets of the enterprise in its pricing the u s postal service has shown some of the signs of such other than welfare maximizing pricing behavior

tax incentives in fiscal federalism an integrated perspective models of fiscal federalism rarely account for the efficiency implications of intergovernmental fiscal ties for federal tax policy this paper shows that fiscal institutions such that federal tax deductibility vertical revenue sharing and fiscal equalization being common features of existing federations encourage local taxation but may discourage federal taxation furthermore the structure of public spending is skewed towards local spending we also show that when considering leviathan governments fiscal institutions reduce confiscatory taxation by the federal government the result is contrary to the cartelization hypothesis brennan and buchanan 1980 finally we characterize the efficient design of intergovernmental fiscal ties jel classification h7 hl h20

ad valorem taxes and the fiscal gap in federations abstract this paper shows that the federal government can always achieve the second best optimum of public good provision but a precise evaluation of the fiscal gap requires an explicit consideration of the underlying fundamentals of the federal economy

an optimal taxation approach to fiscal federalism in a federal system of government each unit of government decides independently how much of each type of public good to provide and what types of taxes and which tax rates to use in funding the public goods in this paper we explore what types of problems can arise from this decentralized form of decision making in particular we describe systematically the types of externalities that one unit of government can create for nonresidents through both its public goods decisions and its taxation decisions the paper also explores briefly what the central government might do to lessen the costs of decentralized decision making

vertical externalities in tax setting evidence from gasoline and cigarettes abstract a common feature of federal systems is that tax bases are joint property consequently state and federal tax setting decisions are interdependent our aim here is to put forward a rudimentary theoretical analysis of this phenomenon and to use the theory as a framework for econometrically estimating the magnitude of the responses we find that when the federal government increases taxes there is a significant positive response of state taxes for example a 10 cent per gallon increase in the federal tax rate on gasoline leads to a 3 2 cent increase in the state tax rate

tax decentralization and local government size this paper investigates the relationship between fiscal federalism and the sizes of local governments while many empirical studies emphasized that grants encourage the growth of local public spending and local taxes constrain it they are more silent regarding the effects of different types of tax autonomy the paper addresses this issue by arguing that tax decentralization as organized on tax bases used only by local governments tax separation rather than on tax base sharing would restrain local public expenditures using an unbalanced panel of oecd countries the key finding is that only property taxes mostly based on a tax separation scheme seem to favor smaller local governments thus while tax decentralization is a necessary condition for limiting the growth of local governments it does not appear sufficient as tax separation schemes among government levels would in fact be required

pricing inefficiency under profit regulation rate of return regulation of a profit seeking firm invites two kinds of distortion 1 inputs may not be chosen efficiently to produce given levels of output and 2 the output levels may not be chosen efficiently most attention has been accorded the first of these the technical input distortion it can even be controlled at least in principle under particular goals and by alternative forms of profit regulation we focus here on the second distortion the matter of inefficient output levels caused by nonoptimal relative prices for multiple outputs our approach is to present second best welfare maximizing prices and then see whether firms will adopt them when seeking goals other than welfare goals such as profit sales cost or output and when subject to various constraints which represent profit regulation over a range of possible goals and forms of profit constraint we find pricing efficiency is difficult to achieve by pursuing a maximum sum of profits per unit of capital or of cost pricing efficiency can be approached but the promise of that remedy is limited inducing reasonably efficient relative prices in a multiproduct regulated firm thus is seen as a difficult task that deserves considerably more attention than it has received

employment based health insurance and the effectiveness of intrafirm competition between insurance providers this paper examines the effects of competition between insurers for the patronage of a firm s employees since for employment based health insurance the employee choice of health insurance plans is often limited the availability of competing plans in the market does not necessarily reflect competition within the firm we utilize data from the 1987 national medical expenditures survey nmes to examine the effect of intrafirm competition in the employment based health insurance market using switching regression models we explore the process that sets premiums and the process that sets the net premium medical cost margins we find that greater choice results in higher margins and lower premiums we also find significantly negative health maintenance organization choice effects on both premiums and margins

pareto efficient international taxation this paper analyzes pareto efficient international tax regimes because every country faces its own national budget constraint the diamond mirrlees production efficiency theorem which underlies key tenets of policy advice in international taxation the desirability of destination basis for commodity taxation of the residence principle for capital income taxation and of free trade does not apply the paper establishes conditions relating to the availability of explicit or implicit devices for reallocating tax revenues across countries under which production efficiency is nevertheless desirable and characterizes the precise ways in which pareto efficient international taxation may require violation of established tenets

vertical tax competition and consumption externalities in a federation with lobbying abstract we consider a federation with two layers of government in which leviathan policy makers levy an excise tax on a consumption good that generates a negative externality and that is produced in an imperfectly competitive market when both layers of government are allowed to tax policy choices are affected also by vertical tax competition in this setting tax policy in general is not efficient we then examine how special interest groups may influence tax policy by lobbying the policy makers we find that depending on market structure and on the level of the externality lobbying can improve efficiency and that tax base sharing by two layers of government can be more efficient than taxation by a single layer

overlapping soft budget constraints abstract our paper identifies a potential problem with decentralization at a time when its virtues are widely extolled we show that responsibility for equalization at multi levels within a decentralized federation creates an overlapping equalization policy that can worsen fiscal discipline contrary to qian and roland 1998 we also show in our set up that fiscal competition among regional rescuers does not act as a commitment device to harden the local budget constraint

nonlinear income taxation and matching grants in a federation with decentralized in kind transfers we extend to a fiscal federalism setting the literature on redistributive in kind transfers in the presence of nonlinear income taxation local governments have a cost advantage motivating decentralization of the in kind transfer the cost structure varies across regions and the central government cannot observe which region is which we show that decentralized in kind transfers can in this setting be an even more important instrument for relaxing self selection constraints thus helping redistribution than in single government models we characterize the optimal marginal tax rates and matching grants the grants have a very different structure than the one derived in earlier studies