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A Positive Model of Overlapping Income Taxation in a Federation of States

Esteban Klor ()

No WP32, Wallis Working Papers from University of Rochester - Wallis Institute of Political Economy

Abstract: This paper develops a positive theory of overlapping income taxation in a federation of states. Its main motivation comes from the observation that in the U.S. states income tax rates are significantly lower than the federal income tax rate. The analysis shows that in a federal system total productivity dispersion between the states determines the federal tax rate. In fact, there exists a positive relation between the level of productivity dispersion and the federal tax rate, even if the income of the decisive voter is above the mean income. When the individuals' income is endogenous, the higher the implemented federal tax rate is, the lower the resulting state tax rate will be, even if the decisive voter at the state level has zero pre-tax income. Empirical evidence obtained from a panel data set on tax schedules at the state level supports the main hypothesis of the paper.

Keywords: Fiscal Federalism; Political Economy; Income Taxation. (search for similar items in EconPapers)
JEL-codes: D72 H23 H77 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: 2002-10
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Journal Article: A positive model of overlapping income taxation in a federation of states (2006) Downloads
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