Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/130443 
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper No. 5801
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Vertical externalities, changes in one level of government’s policies that affect the budget of another level of government, may lead to non-optimal government policies. These externalities are associated with tax bases that are shared or “co-occupied” by two levels of government. Here I consider whether the co-occupancy of tax bases is desirable. I examine the optimal extent of the tax bases of a lower level of government (local) and a higher level (state). I find that it is optimal to have co-occupancy in the absence of other corrective policies if commodities in tax base are substitutes. Further, if the state government can differentially tax the co-occupied segment of the tax base and the segment it alone taxes it will obtain the (second-best) outcome obtained with other policy instruments such as intergovernmental grants. Finally, if there are horizontal externalities generated by cross-border shopping, there is still reason to co-occupy the tax base if commodities are substitutes. As well, local governments should have those commodities with the lowest cross-border shopping costs in their tax base.
Subjects: 
fiscal competition
vertical externalities
tax base co-occupancy
JEL: 
H20
H71
H73
R12
R28
R41
Document Type: 
Working Paper
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