Vertical externalities in tax setting: evidence from gasoline and cigarettes |
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Authors: | Timothy J Besley Harvey S Rosen |
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Institution: | aLondon School of Economics, Houghton Street, London WC2A 2AE, UK;bDepartment of Economics, Fisher Hall, Princeton University, Princeton, NJ 08544-1021, USA |
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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. |
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Keywords: | Cigarette taxes Gasoline taxes |
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