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Tax Competition between Unitary and Federal Countries

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Abstract

We analyse taxation of capital in a two-country model, where one country is unitary while the other one is federal, consisting of two identical regions. Both national and regional governments levy a tax on capital. The countries play a noncooperative game between them, with the government of the federal country acting as a Stackelberg leader with respect to its regional governments. We show under what circumstances, at equilibrium, the federal country sets its tax rate inefficiently low, while the unitary country sets it inefficiently high.

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Authors and Affiliations

  1. Department of Economics, University of Florence, Via delle Pandette 9, 50127, Florence, Italy

    Lisa Grazzini & Alessandro Petretto

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  1. Lisa Grazzini
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  2. Alessandro Petretto
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Corresponding author

Correspondence to Lisa Grazzini.

Additional information

We are deeply grateful to three anonymous referees for their comments, and especially to one of them for extremely helpful suggestions. We also wish to thank participants at ESEM 2004 for fruitful discussions

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Grazzini, L., Petretto, A. Tax Competition between Unitary and Federal Countries. Economics of Governance 8, 17–36 (2007). https://doi.org/10.1007/s10101-006-0012-1

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  • DOI: https://doi.org/10.1007/s10101-006-0012-1

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