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Testing for Vertical Fiscal Externalities

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Abstract

The purpose of this paper is to design a test of whether the vertical external effects associated with tax base sharing among local and regional governments have become internalized via the intergovernmental transfer system. Such tests are important in the sense that the income tax rates chosen by different levels of government will generally be correlated, even if the resource allocation is optimal from society's point of view. By using panel data for the Swedish local and regional public sectors, the results imply that an increase in the regional income tax rate induces the municipalities in the region to decrease their income tax rates. In addition, we are able to reject the null hypothesis that the vertical external effects have become internalized.

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Authors and Affiliations

  1. Department of Economics, Umeå University, SE-901 87, Umeå, Sweden

    Linda Andersson, Thomas Aronsson & Magnus Wikström

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  1. Linda Andersson
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  2. Thomas Aronsson
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  3. Magnus Wikström
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Andersson, L., Aronsson, T. & Wikström, M. Testing for Vertical Fiscal Externalities. International Tax and Public Finance 11, 243–263 (2004). https://doi.org/10.1023/B:ITAX.0000021970.40929.9a

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  • DOI: https://doi.org/10.1023/B:ITAX.0000021970.40929.9a

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