The assignment and division of the tax base in a system of hierarchical governments

William H. Hoyt ()
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William H. Hoyt: University of Kentucky

International Tax and Public Finance, 2017, vol. 24, issue 4, No 6, 678-704

Abstract: Abstract Vertical externalities, changes in one level of government’s policies that affect the budget of another level of government, may lead to non-optimal government policies. These externalities are associated with tax bases that are shared or “co-occupied” by two levels of government. Here I consider whether co-occupancy of tax bases is desirable. I examine the optimal extent of the tax bases of a lower level of government (local) and a higher level (state). I find that it is optimal to have co-occupancy in the absence of other corrective policies if commodities in the tax bases are substitutes. Further, if the state government can differentially tax the co-occupied segment of the tax base and the segment it alone taxes it will obtain the (second-best) outcome obtained with other policy instruments such as intergovernmental grants.

Keywords: Fiscal competition; Vertical externalities; Tax base co-occupancy (search for similar items in EconPapers)
JEL-codes: H20 H71 H73 R12 R28 R41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10797-017-9460-5

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