(Uncontrolled) Aggregate shocks or vertical tax interdependence? Evidende from gasoline and cigarettes

Alejandro Esteller-Moré () and Leonzio Rizzo ()

No 233, Working Papers in Economics from Universitat de Barcelona. Espai de Recerca en Economia

Abstract: Besley and Rosen (1998) were the first authors to empirically estimate the presence of vertical tax externalities. They tested it on gasoline and tobacco unitary taxes. However, they did not take into account the difference in cost of living across states: high cost areas pay less in real terms than low cost areas, since the nominal unit tax on cigarettes and gasoline does not differ according to the state in which it is applied. Consequently, we propose that vertical tax competition can be estimated by deflating all financial variables using the House Price Index (HPI), which is disaggregated by states. This produces a federal tax variable that is expressed in real terms and shows crosssectional variation. This empirical strategy enabled us to disentangle the vertical interdependence between state and federal tax rates from aggregate shocks over time, using US data from 1975 to 2006 on gasoline and tobacco. We found significant horizontal tax competition, which was higher for cigarettes, but no vertical tax reaction. The results were robust to the period analyzed.

JEL-codes: H21 H3 H77 (search for similar items in EconPapers)
Pages: 0 pages
Date: 2009
New Economics Papers: this item is included in nep-pbe
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Journal Article: (Uncontrolled) Aggregate Shocks or Vertical Tax Interdependence? Evidence From Gasoline and Cigarettes (2011)
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