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Labor income taxes in an economic federation with proportional membership fees

Tomas Sjögren ()
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Tomas Sjögren: Umeå University

International Tax and Public Finance, 2019, vol. 26, issue 5, 1137-1165

Abstract: Abstract A significant part of the revenue in the EU budget is raised via a GNI-based resource. The purpose of this paper is to use a stylized model of an economic federation to analyze how this way of raising funds to the central authority affects the labor income taxes implemented by the lower-level governments. This question is analyzed both when the federal fee is proportional to GNI and proportional to GDP. One key result is that if the government in a lower-level jurisdiction acts as a Nash follower vis-a-vis the other governments in the public sector, then there is an incentive to implement a higher tax on labor. Another is that if the lower-level government is able to exercise decentralized leadership vis-à-vis a federal government which is concerned with redistribution, then the incentive structure underlying the taxation of labor is independent of how the federal government collects its revenue.

Keywords: Efficiency; Optimal taxation; Economic federation (search for similar items in EconPapers)
JEL-codes: H21 H41 H70 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:kap:itaxpf:v:26:y:2019:i:5:d:10.1007_s10797-019-09537-w