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Optimal Taxation in a Federal System of Governments

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  • Russell S. Sobel

Abstract

This paper demonstrates that the optimal structure of taxation in a federal system of governments is one in which only lower level governments are allowed to tax, and the higher level of government receives its revenues as contributions from the lower level governments. The central inefficiency created when multiple levels are allowed to tax is a revenue externality between governments that is analogous to a common pool problem. A federal system with multiple levels of taxing authority results in combined tax rates higher than would be optimal, a higher excess burden of taxation, and an inefficiency bias in government spending.

Suggested Citation

  • Russell S. Sobel, 1997. "Optimal Taxation in a Federal System of Governments," Southern Economic Journal, John Wiley & Sons, vol. 64(2), pages 468-485, October.
    • Handle: RePEc:wly:soecon:v:64:y:1997:i:2:p:468-485
    DOI: 10.1002/j.2325-8012.1997.tb00067.x
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    3. George R. Crowley, 2015. "Local Intergovernmental Competition and the Law of 1/n," Southern Economic Journal, John Wiley & Sons, vol. 81(3), pages 742-768, January.

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