Interjurisdictional Tax Competition in a Federal System of Overlapping Revenue Maximizing Governments

Posted: 21 May 2002

See all articles by Laurent Flochel

Laurent Flochel

University Lyon 2

Thierry Madies

Université d'Évry - Centre D'Etudes des Politiques Economiques et de L'Emploi (EPEE); Université Paris I Panthéon-Sorbonne - Laboratoire d'Economie Publique (LAEP)

Abstract

Academic literature in public finance has focused on interjurisdictional tax competition - namely among similar types of local governments - but has leaved vertical externalities arising from interactions between two overlapping governments sharing the same tax base aside. The purpose of this paper is to provide a simple model within which interjurisdictional tax competition and vertical interactions between two overlapping governments that share the same tax base can be analyzed simultaneously. We find that interjurisdictional tax competition reduces the global tax rate set by both overlapping governments (federal and local) but is unable to solve completely the distortion arising from vertical externalities. The model is also extended to allow for government subsidies to industrial capital. We give sufficient conditions for capital subsidies to be more efficient to attract capital when they are granted at a federal level rather than at a local level.

Keywords: Tax competition, Leviathan, tax base sharing, capital subsidies

JEL Classification: H1, H20, H71, H87

Suggested Citation

Flochel, Laurent and Madies, Thierry, Interjurisdictional Tax Competition in a Federal System of Overlapping Revenue Maximizing Governments. International Tax and Public Finance, Vol. 9, No. 2, pp. 121-141, March 2002. Available at SSRN: https://ssrn.com/abstract=312760

Laurent Flochel (Contact Author)

University Lyon 2 ( email )

CNRS UMR 5824
93, chemin des Mouilles - B.P.167
69130 Ecully cedex
France

HOME PAGE: http://www.gate.cnrs.fr/equipe/perso/flochel/flochel.html?

Thierry Madies

Université d'Évry - Centre D'Etudes des Politiques Economiques et de L'Emploi (EPEE)

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

Université Paris I Panthéon-Sorbonne - Laboratoire d'Economie Publique (LAEP)

106 -112 boulevard de l'Hopital
Paris Cedex 13, 75 647
France

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