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International Tax and Public Finance

, Volume 17, Issue 1, pp 1–14 | Cite as

Federal tax competition and the efficiency consequences for local taxation of revenue equalization

  • Christos Kotsogiannis
Article

Abstract

Recent work has shown that a system of equalization grants can neutralize the efficiency loss caused by tax competition among lower-level governments. These models, however, ignore the vertical tax externalities that occur when the federal and lower-level governments levy taxes on the same base. This paper incorporates equalization grants into a standard capital tax competition model in which there are horizontal tax externalities between jurisdictions and vertical tax externalities between the levels of government. It is shown that, even in the presence of vertical tax externalities, an efficient level of lower-level government taxation can be achieved with a modifying version of a standard equalization grant formula.

Keywords

Federal tax competition Fiscal externalities Equalization grants 

JEL Classification

H41 H71 H77 

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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of Exeter Business School, Streatham Court, Rennes DriveExeterUK

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