Incomplete Information in Tax Setting of Local Governments: a Theoretical Framework

Raffaella Santolini

No 295, Working Papers from Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali

Abstract: In the literature, tax interaction is mainly due to tax and yardstick competition. However, we suppose that tax interaction appears when the local policy maker conforms his fiscal policy to decisions taken by his neighbourhood to fill information gaps. Theoretical results show that incomplete information leads to tax mimicking and a higher level of tax rate. Moreover, leviathan governments are more sensitive than benevolent ones to changes in neighbours tax rates (horizontal tax interaction) but less to changes in the central government tax rate (vertical tax interaction). Finally, there is no tax rate internalization effects because an increase in the central government tax rate is not followed by an equivalent decrease of local government tax rate.

Keywords: incomplete information; informative trend; political trend; tax mimicking (search for similar items in EconPapers)
JEL-codes: H30 H71 H77 (search for similar items in EconPapers)
Pages: 10
Date: 2007-08
New Economics Papers: this item is included in nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:anc:wpaper:295

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