Tax mix corners and other kinks
Federico Revelli ()
No 2010/50, Working Papers from Institut d'Economia de Barcelona (IEB)
This paper models the local tax mix determination process in the presence of state-wide tax limitations and shows how excess sensitivity of local public spending to grants (the conventionally and somewhat misleadingly called flypaper effect) arises in the endogenously generated constrained tax mix and cannot in general be taken as a symptom of local government overspending. By means of a panel data switching regression approach that allows for fixed effects and endogenous selection, the paper exploits the clustering of Italian Provinces at the corners produced by upper and lower tax limitations, and provides evidence of considerable cap-generated excess sensitivity.
Keywords: Flypaper effect; excess sensitivity; tax mix; switching regression; endogenous selection (search for similar items in EconPapers)
JEL-codes: C23 C25 H72 (search for similar items in EconPapers)
Pages: 44 pages
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Journal Article: Tax Mix Corners and Other Kinks (2013)
Working Paper: Tax mix corners and other kinks (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ieb:wpaper:doc2010-50
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