Tax Mix Corners and Other Kinks

Federico Revelli

Journal of Law and Economics, 2013, vol. 56, issue 3, 741 - 776

Abstract: This paper models the local tax mix determination process in the presence of statewide fiscal limitations--the decentralized government finance archetype--and shows how excess sensitivity of local public spending to grants (the conventionally and somewhat misleadingly termed "flypaper effect") arises in the constrained tax mix irrespective of whether lower or upper limits bind and how it cannot, in general, be taken as a symptom of local government overspending. An empirical application to Italian province panel data provides consistent evidence of the role of corner solutions produced by two-sided tax limits in explaining the sensitivity of local public expenditures to grants.

Date: 2013
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Working Paper: Tax mix corners and other kinks (2010)
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