Tax structure in a federation

Does national taxation of a base influence the degree to which the local government will use the same tax base? Does the tax rate chosen by one local government influence the choices made by another local government? The theoretical answer to these questions is often in the affirmative because of vertical and horizontal externalities that result when several governments are operating at the same time in a fiscal system. However, little empirical information is available. This paper estimates the impact of horizontal and vertical externalities on the choice of tax rates by local governments operating in a federation. Higher national income tax rates and lower poverty rates are found to lead to lower local income tax rates. (C) 2000 Elsevier Science S.A. All rights reserved. JEL classification: H1; H23; H77.