Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance

Abstract: We empirically reexamine the dominance of tax externalities in Sweden for the period of 2000 through 2011. Where hierarchical governments share a mobile tax base, a tax externality can arise not only horizontally across the same level of government but also vertically between different levels of government. A horizontal externality shifts tax rates toward a level that is too low, whereas a vertical externality pushes them toward a level that is too high. The net outcome of these competing effects is theoretically unclear within benevolent federal government systems. Brülhart and Jametti (2006) implemented a pioneering empirical test of the issue using Swiss data. Their empirical setting, however, assumes a single tax instrument, which contradicts the fiscal system in Switzerland. This inconsistency would theoretically distort their estimation. By contrast, our study investigates the pure dominance of tax externality in a sample of Swedish jurisdictions that can tax only personal income. We find a vertical externality to be relatively dominant.

Keywords: Interregional tax competition; Horizontal and vertical tax externalities; Benevolent governmental systems; Personal income taxes; Swedish tax system; Housing market

JEL-codes: H21; H24; H71; R39

30 pages, April 28, 2014

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