Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes / Timothy J. Besley, Harvey S. Rosen.

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Besley, Timothy J

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w6517.Publication details: Cambridge, Mass. National Bureau of Economic Research 1999.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.2-cent increase in the state tax rate.

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Previous	nber w6514 The Costs and Benefits of Intensive Treatment for Cardiovascular Disease /	nber w6515 Changing Inequality in Markets for Workplace Amenities /	nber w6516 The Morning After: The Mexican Peso in the Aftermath of the 1994 Currency Crisis /	nber w6517 Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes /	nber w6518 Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty /	nber w6519 The More Things Change: Immigrants and the Children of Immigrants in the 1940s, the 1970s, and the 1990s /	nber w6520 Falling Union Membership and Rising Wage Inequality: What's the Connection? /	Next

March 1999.

A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.2-cent increase in the state tax rate.