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Testing for Vertical Fiscal Externalities

Author

Listed:
  • Andersson, Linda

    (Department of Economics, Umeå University)

  • Aronsson, Thomas

    (Department of Economics, Umeå University)

  • Wikström, Magnus

    (Department of Economics, Umeå University)

Abstract

The purpose of this paper is to design a test of whether the vertical external effects associated with tax base sharing among local and regional governments have become internalized via the intergovernmental transfer system. Such tests are important in the sense that the income tax rates chosen by different levels of government will generally be correlated, even if the resource allocation is optimal from society's point of view. By using panel data for the Swedish local and regional public sectors, the results imply that an increase in the regional income tax rate induces the municipalities in the region to decrease their income tax rates. In addition, we are able to reject the null hypothesis that the vertical external effects have become internalized.

Suggested Citation

  • Andersson, Linda & Aronsson, Thomas & Wikström, Magnus, 2001. "Testing for Vertical Fiscal Externalities," Umeå Economic Studies 573, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0573
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    References listed on IDEAS

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    More about this item

    Keywords

    Local and regional governments; optimal taxation; vertical external effects;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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