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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We thank three anonymous referees and the editor of the journal, Jay Wilson, for a number of constructive comments. This paper has also benefited from comments from Ourania Karakosta, Mick Keen, Miltiadis Makris, Leonzio Rizzo, and Robert Schwager. Financial support from the Catalan Government Science Network (SGR2005-177 and XREPP) and the Spanish Ministry of Education and Science Research Project (SEJ2006-4444) is gratefully acknowledged. The usual caveat applies.
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Kotsogiannis, C. Federal tax competition and the efficiency consequences for local taxation of revenue equalization. Int Tax Public Finance 17, 1–14 (2010). https://doi.org/10.1007/s10797-008-9094-8
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DOI: https://doi.org/10.1007/s10797-008-9094-8