Vertical Versus Horizontal Tax Externalities: An Empirical Test

Marius Brülhart and Mario Jametti ()

Department of Economics Working Papers from McMaster University

Abstract: We study taxation externalities in federations of benevolent governments. Where different hierarchical government levels tax the same base, one can observe two types of externalities: a horizontal externality, working among governments of the same level and leading to tax rates that are too low compared to the social optimum; and a vertical externality, working between different levels of government and leading to suboptimally high tax rates. Building on the model of Keen and Kotsogiannis (2002), we derive a discriminating hypothesis to distinguish vertical and horizontal tax externalities based on measurable variables. This test is applied to a panel data set on local taxes in a sample of Swiss municipalities that feature direct-democratic fiscal decision making, so as to maximize the correspondence with the "benevolent" governments of the theory. We find that vertical externalities dominate - they are thus an observed empirical phenomenon as well as a notable extension to the theory of tax competition.

JEL-codes: H21 H25 H7 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2004
New Economics Papers: this item is included in nep-cdm and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Vertical versus horizontal tax externalities: An empirical test (2006)
Working Paper: Vertical versus Horizontal Tax Externalities: An Empirical Test (2004)
Working Paper: Vertical Versus Horizontal Tax Externalities: An Empirical Test (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:mcm:deptwp:2004-14

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