Umeå Economic Studies, Department of Economics, Umeå University
No 573:
Testing for Vertical Fiscal Externalities
Linda Andersson ()
, Thomas Aronsson ()
and Magnus Wikström ()
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.
Keywords: Local and regional governments; optimal taxation; vertical external effects; (follow links to similar papers)
JEL-Codes: D62; H21; H23; (follow links to similar papers)
26 pages, November 9, 2001
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