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Vertical Fiscal Externalities and Federal Tax-Transfers under Variable Factor Supplies

Author

Listed:
  • Nikos Tsakiris
  • Panos Hatzipanayotou
  • Michael S Michael

Abstract

Within a model of variable supply of capital due to international mobility and variable labor supply due to endogenous labor-leisure choice, we revisit the issues of vertical fiscal externalities, and of federal tax-transfers. Capital and labor taxes by federal and state governments finance the provision of federal and of state public consumption goods. When capital and labor are substitutes in production, we show that (i) the state’s optimal policy calls for capital and labor taxes, (ii) the vertical fiscal externality can be reversed from negative, implying inefficiently high noncooperative capital taxes, to positive, implying inefficiently low noncooperative capital taxes, and (iii) under centralized leadership the federal government replicates the second best optimum with a capital tax, and possibly, top-down transfers.

Suggested Citation

  • Nikos Tsakiris & Panos Hatzipanayotou & Michael S Michael, 2019. "Vertical Fiscal Externalities and Federal Tax-Transfers under Variable Factor Supplies," CESifo Economic Studies, CESifo Group, vol. 65(3), pages 296-317.
    • Handle: RePEc:oup:cesifo:v:65:y:2019:i:3:p:296-317.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifz011
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    Cited by:

    1. Mutsumi Matsumoto & Hikaru Ogawa, 2022. "Tax Competition and Efficient Fiscal Transfers under Capital and Labor Income Taxes," CIRJE F-Series CIRJE-F-1196, CIRJE, Faculty of Economics, University of Tokyo.

    More about this item

    Keywords

    fiscal federalism; vertical fiscal externalities; bottom-up and top-down transfers; variable factor supplies;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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