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Vertical Tax Externalities in the Theory of Fiscal Federalism

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  • Mr. Michael Keen

Abstract

Vertical tax externalities between levels of government can occur in federal structures, with responses to the tax policies of one level of government affecting the tax base of the other. Such effects mostly arise when federal and state governments co-occupy the same tax base. This paper examines these externalities by considering their implications for a range of issues in fiscal federalism: the relationship between state and federal tax rates, the equilibrium levels of these taxes, the relevance of experience in federal countries for policy design in international settings, intergovernmental grants, and the assignment of tax powers among levels of government.

Suggested Citation

  • Mr. Michael Keen, 1997. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Working Papers 1997/173, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1997/173
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    More about this item

    Keywords

    WP; federal government; equilibrium state tax; public goods; federal-state interaction; gas excise; state tax rate; taxes gasoline; Subnational tax; Fiscal federalism; Rent tax; North America;
    All these keywords.

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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