International Tax and Public Finance

, Volume 7, Issue 2, pp 163–175 | Cite as

Shared Tax Sources and Public Expenditures

  • Matthias Wrede


This paper deals with a specific vertical assignment of public functions in a federation: Two levels of government share both the same tax source and expenditure on a productivity increasing public service. We consider surplus maximizing Leviathan governments which provide public services in order to increase their potential tax base. The Nash equilibrium is characterized by overtaxation and relative to surplus maximization—depending on whether or not the public goods are sufficiently complementary with the entire tax base—either underprovision or overprovision of the public service. The implications of these results, in terms of welfare and potential use for earmarking taxes are also considered.

fiscal federalism Leviathan tax base overlap fiscal externalities taxation public expenditure 


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© Kluwer Academic Publishers 2000

Authors and Affiliations

  • Matthias Wrede

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