Interaction between vertical and horizontal tax competition: evidence and some theory.

The aim of this paper is to determine to what extent and how federal taxes affect local tax decisions. Testing the impact of an increase in the federal tax on horizontal tax competition with Canada-US data for 1984--1994, we find evidence that an increase in federal tax affects horizontal tax competition. The novelty of our approach is that it indirectly tests the effect of an increase in federal tax on provincial tax, by testing whether provincial reaction to an increase in neighboring tax changes according to the federal tax level. The test allows for control of yearly macroeconomic shocks by inserting dummies for each year. These are not used in the empirical literature on vertical tax competition because they would cause perfect collinearity with the federal tax.horizontal externality; vertical externality; tax competition; tax rate

Local government responsiveness to federal transfers: theory and evidence

Federal transfers can depend on local fiscal capacity which is measured by local tax bases. The aim of this paper is to understand to what extent and how these transfers affect local tax decisions. We develop a model with two provinces producing one mobile good. The good is taxed according to the destination principle. Final consumers decide to buy the good from the province where it is cheaper. The two provinces engage in tax competition. The introduction of scale economies into the shopping technology generates nonlinear tax reaction functions which make it possible to test the effect of a transfer equalizing local tax bases on tax competition in two complementary tax regimes. Used for this purpose are cigarette and gasoline tax data from Canada. In the case of cigarette tax it is found that nonlinearity in tax competition is almost entirely offset when equalization holds: tax competition in the two tax regimes become closer. The shopping technology for gasoline gives less scope for scale economies, so that equalization does not affect reaction functions.fiscal competition; equalization; transfer; externality; tax-rate

Interaction between Vertical and Horizontal tax Competition: Theory and Evidence

We develop a model with two provinces, producing two goods: one mobile and the other not. The mobile good is taxed according to the destination principle by the local government; it is also federally taxed. People decide to buy the good at the most advantageous price. Namely they can buy bootlegged cigarettes and, if the price is very high in both provinces, they can decide to buy smuggled cigarettes, on which no tax is levied. The two provinces engage in tax competition. The province tax-reaction function are non linear because of scale economies in the cost of bootlegging. An increase in federal tax offsets the non linearity, because it decreases the magnitude of the horizontal externality. We test the theoretical results by using Canada-US data set from 1984-1994.horizontal externality; vertical externality; tax competition; tax rate

Equalisation and Fiscal Competition

The paper’s aim is to link two different issues: equalization and fiscal competition. In the model there are two regions: the first one has rich citizens and the other one has poor citizens. Regional representatives in a federal Council must decide on the introduction of an equalization transfer based on fiscal capacity. Regions choose tax rates on a consumption good and the citizens choose where to buy the consumption good. We show that the existence of the transfer stimulates regions to choose higher tax rates. The economic insight for this result is that the existence of a mobile tax base generates a negative fiscal externality on each regional planner. We show that the equalization transfer presents a wider range of agreement opportunities between regional representatives to correct the inefficient levels of tax rates than a compensation transfer does. This is because efficiency gains are equalized with the introduction of an equalization transferfiscal competition; equalization; transfer; externality; tax-rate

US Excise Tax Horizontal Interdependence: Yardstick vs. Tax Competition

US excise tax rates are state interdependent. For example, a one-cent increase in the cigarette tax rate implies a contemporaneous cigarette tax increase of 0.18 cents in the neighboring state, while in the case of gasoline taxation the reaction to the same rise is just 0.11 cents. However, identifying the source of this interaction is key to its normative assessment. Our empirical analysis – spanning the period 1992 to 2006 – finds that interdependence in the case of gasoline taxation is driven just by the (fear of) base mobility. By contrast, in the case of cigarette taxation, it is politically driven: only states with non-term limited governors react (providing evidence of yardstick competition), especially as the election year approaches. Additionally, cigarette taxes tend to be lower when the election year approaches, but again only under non-term limited governors, while the existence of smokers in the state tends to reduce the level of cigarette taxation independently of the electoral cycle and of the presence of a term limited governor.vertical tax competition; yardstick competition; termlimit; election year

Do Small States Get More Federal Monies? Myth and Reality about the US Senate Malapportionment

We analyze the relationship between senate malapportionment and the allocation of the US federal budget to the states during the period 1978-2002. A substantial literature originating from the in�uential paper by Atlas et al. (1995), using a within estimation methodology �nds that small and overrepresented states get signi�cantly larger shares of federal funds. Revisiting the econometric speci�cation used by the current empiri- cal research, we show that the number of senators percapita is inappropriate to capture malapportionement in regressions using broad federal programs, and that the results ob- tained with this indicator are extremely non-robust to reasonable speci�cation changes. In particular, senators percapita have a signi�cant impact on federal spending only in re- gressions containing state �xed e¤ects. Furthermore, the coefficients estimated using the within methodology are statistically di¤erent across states and, therefore, cannot be used to assess spending differentials between states. The magnitude and signi�cance of those coe¢ cients suggest a within state-speci�c inverse relationship between broad spending categories and population which is not systematically related to the size of the states and seems more compatible with incrementalist theories of budget allocation.federal budget; malapportionment; small state advantage; overrepresentation

Single vs double ballot and party coalitions: the impact on fiscal policy. Evidence from Italy

We use data for all Italian municipalities, from 2001-2006, to empirically test the extent to which two electoral rules, which hold, for small and large municipalities, affect fiscal policy decisions. Municipalities with fewer than 15,000 inhabitants elect their mayors in accordance with a single ballot plurality rule while the rest of the municipalities uses a run-off plurality rule. Per capita total taxes, charges and current expenditure in large municipalities are lower than in small ones if the mayor of the large municipality does not need a broad coalition to be elected

Do Small States Get More Federal Monies?Myth and Reality About the US SenateMalapportionment

We analyze the relationship between senate malapportionment and the allocation ofthe US federal budget to the states during the period 1978-2002. A substantialliterature originating from the influential paper by ?) finds that small andoverrepresented states get significantly larger shares of federal funds. We show thatthese studies suffer from fundamental identification problems and grosslyoverestimate the impact of malapportionment. Most of the estimated impact is not ascale but a change effect. Rather than evidence of "small state advantage", we findthat states with fast growing population are penalized in the allocation of the federalbudget independently of whether they are large or small.federal budget, malapportionment, small state advantage,overrepresentation

The power of the purse: what do the data say on US federal budget allocation to the states?"

This paper provides new evidence on the relevance of alternative theories of federal budget allocation to US States. Using a panel of 48 states over 20 years, we estimate the size and relative importance of different institutional and political factors in determining such allocation. We find that although socio-economic characteristics are very important explanatory variables of spending allocation, some states receive disproportionate amounts of money for reasons essentially linked to politics and the budget allocation process. In particular we find that the overrepresentation of small states determined by the Senate and Presidential election systems has an important impact on federal budget allocation. States whose governor has the same political affiliation of the President receive more federal funds in the form of procurement and defense spending. On the other hand, the political alignment between governor and majority in the House and/or Senate does not affect the allocation of federal funds. We do not find any evidence that marginal states receive more funding; on the opposite we find that safe states tend to be rewarded. Finally, the appropriation committee membership affects the distribution of broad spending categories like total expenditure per capita and direct payments to individuals, while senior members have a disproportionate impact on grant allocationfederal budget, pork-barrel, congress, committees, president

Flat tax: european experiences and the Italian proposal

The paper discusses the flat tax, intended as a potential comprehensive reform of personal income tax. After a presentation of the broad characteristics of the flat tax model, we extensively describe the applications of this model that have taken place so far in some countries and its impact on financial and economic indicators. The last part of the paper focuses on the Italian case, assessing the possible distributional effects of the application on Italian households\u2019 incomes of some recently presented flat tax reform proposals