Federal tax competition and the efficiency consequences for local taxation of revenue equalization |
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Authors: | Christos Kotsogiannis |
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Institution: | 1.Department of Economics,University of Exeter Business School, Streatham Court, Rennes Drive,Exeter,UK |
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Abstract: | Recent work has shown that a system of equalization grants can neutralize the efficiency loss caused by tax competition among
lower-level governments. These models, however, ignore the vertical tax externalities that occur when the federal and lower-level
governments levy taxes on the same base. This paper incorporates equalization grants into a standard capital tax competition
model in which there are horizontal tax externalities between jurisdictions and vertical tax externalities between the levels
of government. It is shown that, even in the presence of vertical tax externalities, an efficient level of lower-level government
taxation can be achieved with a modifying version of a standard equalization grant formula. |
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Keywords: | |
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