Vertical Tax Competition with Tax Sharing and Equalization Grants

Lisa Grazzini and Alessandro Petretto ()

Giornale degli Economisti, 2006, vol. 65, issue 1, 75-94

Abstract: The aim of this paper is to analyse how vertical fiscal externalities affect local tax policies within a federal country. According to the theoretical literature on fiscal federalism, the direction of this impact is ambiguous, although a complementarity between the two tax policies, federal and local, tends to prevail. Our main result shows instead that, with a more general system of financing local public expenditure, federal and local policies tend more easily to be strategic substitutes. Such a result is obtained within a federation where local public expenditures are financed through three different tax instruments: a surtax on the local fiscal base, a revenue sharing, and an equalization grant. This financing system is rather general and in some sense similar to that provided by the recently reformed Italian Constitution.

Keywords: fiscal federalism; fiscal externality; vertical tax competition (search for similar items in EconPapers)
JEL-codes: H2 H41 H71 H77 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (2)

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