Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes

Timothy Besley () and Harvey Rosen ()

No 6517, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H20 H77 (search for similar items in EconPapers)
Date: 1999-03
Note: PE
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Related works:
Working Paper: Vertical externalities in tax settings: evidence from gasoline and cigarettes (1997)
Journal Article: Vertical externalities in tax setting: evidence from gasoline and cigarettes (1998)
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