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Interjurisdictional tax competition in a federal system of overlapping revenue maximizing governments

Abstract : Academic literature in public finance has focused on interjurisdictional tax competition-namely among similar types of local governments-but has leaved vertical externalities arising from interactions between two overlapping governments sharing the same tax base aside. The purpose of this paper is to provide a simple model within which interjurisdictional tax competition and vertical interactions between two overlapping governments that share the same tax base can be analyzed simultaneously. We find that interjurisdictional tax competition reduces the global tax rate set by both overlapping governments (federal and local) but is unable to solve completely the distortion arising from vertical externalities. The model is also extended to allow for government subsidies to industrial capital. We give sufficient conditions for capital subsidies to be more efficient to attract capital when they are granted at a federal level rather than at a local level.
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https://hal.archives-ouvertes.fr/hal-02878035
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Submitted on : Monday, June 22, 2020 - 7:14:55 PM
Last modification on : Saturday, August 28, 2021 - 3:19:42 AM

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Laurent Flochel, Thierry Madies. Interjurisdictional tax competition in a federal system of overlapping revenue maximizing governments. International Tax and Public Finance, Springer Verlag, 2002, 9, pp.121-141. ⟨10.1023/A:1014695219494⟩. ⟨hal-02878035⟩

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