Testing for Vertical Fiscal Externalities

Linda Andersson Järnberg, Thomas Aronsson () and Magnus Wikström ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

No 573, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: The purpose of this paper is to design a test of whether the vertical external effects associated with tax base sharing among local and regional governments have become internalized via the intergovernmental transfer system. Such tests are important in the sense that the income tax rates chosen by different levels of government will generally be correlated, even if the resource allocation is optimal from society's point of view. By using panel data for the Swedish local and regional public sectors, the results imply that an increase in the regional income tax rate induces the municipalities in the region to decrease their income tax rates. In addition, we are able to reject the null hypothesis that the vertical external effects have become internalized.

Keywords: Local and regional governments; optimal taxation; vertical external effects (search for similar items in EconPapers)
JEL-codes: D62 H21 H23 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2001-11-09
New Economics Papers: this item is included in nep-pbe and nep-pub
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Citations: View citations in EconPapers (11)

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Journal Article: Testing for Vertical Fiscal Externalities (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:umnees:0573

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