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Staff Papers Logo    September 1998
Volume 45, Number 3
Vertical Tax Externalities in the Theory of Fiscal Federalism
By Michael Keen

Full Text of This Article (PDF 112 K)

Abstract: Federal structures create the possibility of vertical tax externalities between levels of government, with the private sector's response to the tax policy decisions of one level affecting the tax base of another. Such effects arise most obviously when both levels of government co-occupy the same tax base. This paper reviews and extends recent results on the implications of such externalities for the relationship between state and federal tax rates, the equilibrium levels of these taxes, the (ir)relevance of experience in federal countries for analyzing international tax issues, the pattern of intergovernmental grants, and the assignment of tax powers. [JEL H3,H7,H21]

1998 International Monetary Fund