Commodity Tax Competition Between Member States of a Federation: Equilibrium and Efficiency

Jack Mintz and Henry Tulkens

Chapter Chapter 19 in Public goods, environmental externalities and fiscal competition, 2006, pp 449-489 from Springer

Abstract: The purpose of this paper is to characterize the outcome of tax competition between autonomous fiscal authorities. It treats the case of a two-region economy, where an originbased commodity tax is levied by each region on some private good to finance a local public good. A second private good is untaxed. We first describe ‘regional market equilibria’, whereupon consumers of each region allocate their purchases of private goods between domestic and nondomestic ones according to the structure of relative prices, taxes, and transportation costs. Next, regional optimal tax levels and public good quantities are derived, the tax of the other region being held constant. Fiscal competition arises from the ability of one region in choosing its tax to alter the tax base of the other. A ‘noncooperative fiscal equilibrium’ (NCFE) is then defined as the pair of fiscal choices such that each region’s tax and public good supply are optimal for itself, given those of the other region. After examining the conditions for the existence of aNCFE, its efficiency properties are considered. Pareto efficient tax levels are computed and compared with the NCFE ones, showing the sources and nature of fiscal externalities. Finally, it is established that, in this model, fiscal choices that are Pareto improving with respect to a NCFE never reduce the taxes in both regions, and always increase the tax of a tax importing region.

Keywords: Public Good; Reaction Function; Private Good; Mixed Equilibrium; Local Public Good (search for similar items in EconPapers)
Date: 2006
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Related works:
Journal Article: Commodity tax competition between member states of a federation: equilibrium and efficiency (1986)
Working Paper: Commodity tax competition between member states of a federation: equilibrium and efficiency (1986)
Working Paper: Commodity tax competition between member states of a federation: equilibrium and efficiency (1984)
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DOI: 10.1007/978-0-387-25534-7_23

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