Tax Policy in an Economic Federation With Proportional Membership Fees

Tomas Sjögren

No 859, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: A significant part of the revenue in the EU budget is raised via a GNI-based resource. The purpose of this paper is to analyze how this way of raising funds to the central authority in an economic federation affects the tax policy implemented by the lower level jurisdictions. This question is analyzed both when labor is immobile, as well as mobile, between the jurisdictions. A key result is that if the government in a lower level jurisdiction acts as a Nash follower, then it has an incentive to implement a distortionary tax on labor whereas if the lower level government is able to act as a strategic leader within the federation, then the incentive to distort the labor market may be redundant.

Keywords: efficiency; optimal taxation; economic federation (search for similar items in EconPapers)
JEL-codes: H21 H41 H70 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2013-05-16
New Economics Papers: this item is included in nep-pbe and nep-pub
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