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Optimal Taxation in a Federal System of Governments
Author(s) -
Sobel Russell S.
Publication year - 1997
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.1997.tb00067.x
Subject(s) - inefficiency , externality , economics , revenue , public economics , tax revenue , government revenue , optimal tax , government (linguistics) , indirect tax , tax reform , economic policy , microeconomics , finance , linguistics , philosophy
This paper demonstrates that the optimal structure of taxation in a federal system of governments is one in which only lower level governments are allowed to tax, and the higher level of government receives its revenues as contributions from the lower level governments. The central inefficiency created when multiple levels are allowed to tax is a revenue externality between governments that is analogous to a common pool problem. A federal system with multiple levels of taxing authority results in combined tax rates higher than would be optimal, a higher excess burden of taxation, and an inefficiency bias in government spending.