Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes

24 Pages Posted: 19 May 1999  

Timothy J. Besley

London School of Economics & Political Science (LSE) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Harvey S. Rosen

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 1999

Abstract

A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.2-cent increase in the state tax rate.

Suggested Citation

Besley, Timothy J. and Rosen, Harvey S., Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes (March 1999). NBER Working Paper No. w6517. Available at SSRN: https://ssrn.com/abstract=161310

Timothy J. Besley (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Harvey S. Rosen

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

Princeton University - Department of Economics ( email )

001 Fisher Hall
Princeton, NJ 08544
United States

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