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What Drives Vertical Fiscal Interactions? Evidence from the 1980 Crude Oil Windfall Act

Fidel Perez-Sebastian and Ohad Raveh ()
Authors registered in the RePEc Author Service: Fidel Perez Sebastian ()

No 183, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: In economies with multi-level governments, why would a change in the …scal rule of a gov-ernment in one level lead to a …scal response by a government in a di¤erent level? Previous explanations focus on the standard common-pool problem. In this paper we study a new potential channel: complementarities between the public goods supplied by the two governments. First, we illustrate its potential key role in determining the sign of the vertical reaction through a standard model of horizontal tax competition with vertical …scal interactions. Second, we propose a novel strategy for identifying it, by considering an empirical design that con…nes the common-pool channel to speci…c locations. We implement this design through a quasi-natural experiment: the 1980 U.S. Crude Oil Windfall Act, which increased federal tax collections from sale of crude oil, thereby a¤ecting the tax base of oil rich states speci…cally. This latter feature enables attributing the vertical …scal reactions of the remaining states to the complementarity channel. Following this strategy, via a di¤erence-in-di¤erences approach, we decompose the sources of the vertical …scal reactions arising from this federal tax change and …nd that those attributed to the novel channel: (i) point at complementarity between state and federal public goods; (ii) account for approximately 40% of the overall vertical …scal response; (iii) are manifested primarily via corporate taxation.

Keywords: Federalism; vertical fiscal reactions; common-pool problem; complimentarities; natural resources (search for similar items in EconPapers)
JEL-codes: H77 H71 Q32 (search for similar items in EconPapers)
Date: 2016-11-23
New Economics Papers: this item is included in nep-ene, nep-pbe and nep-pub
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