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Do vertical tax externalities lead to tax rates being too high? A note

Madiès, Thierry

In: The Annals of Regional Science, 2008, vol. 42, no. 1, p. 225-233

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    Titre
    • Do vertical tax externalities lead to tax rates being too high? A note
    Auteur
    • Madiès, Thierry. Department of Political Economics, University of Fribourg, Boulevard de Pérolles 90, 1700, Fribourg, Switzerland
    Type de document
    • Postprint
    Langue
    • Anglais
    Publié dans
    • The Annals of Regional Science, 2008, vol. 42, no. 1, p. 225-233. Springer-Verlag
    Autre version électronique
    Classification
    • Sciences de la terre
    Identifiant OAI-PMH
    • oai:doc.rero.ch:316884
    Summary
    When both vertical and horizontal externalities are at work in a federation, they generally distort levels of taxation in opposite directions. This article is an extension of the Keen and Kotsogiannis (Am Econ Rev March: 363-370, 2002) model. It focuses on state tax policy when states provide an industrial public good increasing firms' marginal productivity rather than a residential public good intended to households. We find that some results related to whether equilibrium state taxes are likely to be too high or too low are much more complex when state-provided industrial public goods are considered. First, we show that in the presence of industrial public goods, a dominant vertical externality may result in state tax rates being too low (and not too high as it is the case with residential public goods). Second, we find that under certain conditions, horizontal and vertical externalities may point in the same direction and reinforce each other towards tax rates being too high or too low