Optimal Federal Taxes with Public Inputs

Diego Martínez

FinanzArchiv: Public Finance Analysis, 2008, vol. 64, issue 4, 422-433

Abstract: This paper deals with the solution to vertical expenditure externalities in a federation with two levels of government sharing taxes. Under these circumstances, the Nash equilibrium does not satisfy the condition for production efficiency in the provision of public inputs. This vertical expenditure externality is removed when the federal government, behaving as Stackelberg leader, chooses the optimal tax rate on l abor income. The sign of this tax rate depends on the elasticity of marginal productivity of the public input with respect to employment. M oreover, the previous result that the two vertical (tax and expenditure) externalities are independent of each other is confirmed here.

Keywords: vertical externalities; public inputs; federal taxes (search for similar items in EconPapers)
JEL-codes: H2 H4 H7 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:mhr:finarc:urn:sici:0015-2218(200812)64:4_422:oftwpi_2.0.tx_2-y

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DOI: 10.1628/001522108X397615

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