Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 859: Tax Policy in an Economic Federation With Proportional Membership Fees

Tomas Sjögren ()
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Tomas Sjögren: Department of Economics, Umeå School of Business and Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: A significant part of the revenue in the EU budget is raised via a GNI-based resource. The purpose of this paper is to analyze how this way of raising funds to the central authority in an economic federation affects the tax policy implemented by the lower level jurisdictions. This question is analyzed both when labor is immobile, as well as mobile, between the jurisdictions. A key result is that if the government in a lower level jurisdiction acts as a Nash follower, then it has an incentive to implement a distortionary tax on labor whereas if the lower level government is able to act as a strategic leader within the federation, then the incentive to distort the labor market may be redundant.

Keywords: efficiency; optimal taxation; economic federation

JEL-codes: H21; H41; H70

27 pages, May 16, 2013

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