Vertical externalities in tax settings: evidence from gasoline and cigarettes

Timothy Besley and Harvey Rosen ()

No W97/23, IFS Working Papers from Institute for Fiscal Studies

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 3.5-cent increase in the state tax rate.

Date: 1997-08-16
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Related works:
Working Paper: Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes (1999)
Journal Article: Vertical externalities in tax setting: evidence from gasoline and cigarettes (1998)
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