Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/180305
Authors: 
Kevin, Milligan
Smart, Michael
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 7043
Abstract: 
We develop a theory of cross-border income shifting in response to subnational personal taxation in a federation and examine its implications for the excess burden of personal taxes. We show how a properly-chosen federal tax rate can offset the fiscal externality between states and facilitate decentralization, even in a heterogeneous federation where unitary taxation is suboptimal. Optimal taxes depend on the elasticities of national tax avoidance and of cross-state tax base shifting. We estimate these elasticities around a tax decentralization reform in Canada, finding both to be empirically relevant. We discuss the implications for optimal federalism.
Subjects: 
taxation
redistribution
fiscal federalism
JEL: 
H20
Document Type: 
Working Paper

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