Tax incentives in fiscal federalism: an integrated perspective

TY - JOUR

T1 - Tax incentives in fiscal federalism

T2 - an integrated perspective

AU - Kelders, Christian

AU - Köthenbürger, Marko

N1 - JEL classification: H7, H1, H20

PY - 2010/5

Y1 - 2010/5

N2 - Abstract. Models of fiscal federalism rarely account for the efficiency implications of intergovernmental fiscal ties for federal tax policy. This paper shows that fiscal institutions such that federal tax deductibility, vertical revenue-sharing, and fiscal equalization (being common features of existing federations) encourage local taxation, but may discourage federal taxation. Furthermore, the structure of public spending is skewed towards local spending. We also show that, when considering Leviathan governments, fiscal institutions reduce confiscatory taxation by the federal government. The result is contrary to the Cartelization Hypothesis (Brennan and Buchanan 1980). Finally, we characterize the efficient design of intergovernmental fiscal ties.

AB - Abstract. Models of fiscal federalism rarely account for the efficiency implications of intergovernmental fiscal ties for federal tax policy. This paper shows that fiscal institutions such that federal tax deductibility, vertical revenue-sharing, and fiscal equalization (being common features of existing federations) encourage local taxation, but may discourage federal taxation. Furthermore, the structure of public spending is skewed towards local spending. We also show that, when considering Leviathan governments, fiscal institutions reduce confiscatory taxation by the federal government. The result is contrary to the Cartelization Hypothesis (Brennan and Buchanan 1980). Finally, we characterize the efficient design of intergovernmental fiscal ties.

U2 - 10.1111/j.1540-5982.2010.01589.x

DO - 10.1111/j.1540-5982.2010.01589.x

M3 - Journal article

SN - 0008-4085

VL - 43

SP - 683

EP - 703

JO - Canadian Journal of Economics

JF - Canadian Journal of Economics

IS - 2

ER -