Fiscal Externalities in Multilevel Tax Structures: Evidence from Concurrent Income Taxation

Federico Revelli, Tsung-Sheng Tsai () and Roberto Zotti

No 9276, CESifo Working Paper Series from CESifo

Abstract: This paper exploits the multi-tiered structure of personal income taxation in Italy to investigate within-tier (horizontal) and between-tiers (vertical and diagonal) fiscal externalities. Estimation of an unrestricted income tax reaction function on municipalities located at internal regional borders using o¤-border Wald-type grouping variables as well as the staggered schedule of mayoral elections as instruments for endogenous spatial lags reveals strong positive spatial dependence in municipal tax rates. On the other hand, there is no evidence of a response of municipal tax rates to regional tax policies, suggesting that border discontinuity estimators that rely on consolidated spatial specifications (lower-plus-upper-tier tax rates) impose restrictions on the parameters of the reaction function that are unwarranted in these circumstances.

Keywords: fiscal externalities; income taxation; grouping instrumental variable; border discontinuity estimator (search for similar items in EconPapers)
JEL-codes: H24 H71 H73 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-eur, nep-isf, nep-pbe, nep-pub and nep-ure
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Working Paper: Fiscal externalities in multilevel tax structures: Evidence from concurrent income taxation (2022)
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