The assignment and division of the tax base in a system of hierarchical governments

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Assignment and Division of the Tax Base in a System of Hierarchical Governments Abstract Vertical externalities, changes in one level of government's policies that affect the budget of another level of government, may lead to non-optimal government policies. These externalities are associated with tax bases that are shared or "co-occupied" by two levels of government. Here I consider whether the co-occupancy of tax bases is desirable. I examine the optimal extent of the tax bases of a lower level of government (local) and a higher level (state). I find that it is optimal to have co-occupancy in the absence of other corrective policies if commodities in tax base are substitutes. Further, if the state government can differentially tax the co-occupied segment of the tax base and the segment it alone taxes it will obtain the (second-best) outcome obtained with other policy instruments such as intergovernmental grants. Finally, if there are horizontal externalities generated by cross-border shopping, there is still reason to co-occupy the tax base if commodities are substitutes. As well, local governments should have those commodities with the lowest cross-border shopping costs in their tax base. Terms of use: Documents inJEL-Codes: H200, H710, H730, R120, R280, R410.

Hidden Havens: State and Local Governments as Tax Havens?

“…The choice of the tax mix by local jurisdictions is also influenced by the hierarchical nature of federal systems (Hoyt 2017). If a state government already taxes a given base at a relatively high tax rate, then local governments may want to lower/raise their tax rates in response.…”

Intergovernmental Grants and Policy Competition: Concepts, Institutions, and Evidence

“…Indeed, the analyses of Olson (1969) and Musgrave (1971) highlight that multiple, and potentially overlapping, layers of government may be necessary to map jurisdictions into the regions that capture the benefits of various public goods. Additionally, there are cases in which allowing multiple levels of government to tax the same base can be efficiency improving (Hoyt, 2017). Gordon (1983) can similarly be read as cautioning readers that decentralization is not a panacea.…”