Abstract

The choice of local tax rates and local public good levels in an interregional economic system cannot be efficient when there is mobility of persons or goods. In fact in a federal system each region chooses tax rates and/or local public goods taking into account only the level of its welfare and not the level of the welfare of all regions of the federation. We examine how the literature deals with this issue, looking at some interesting particular cases: tax competition on consumption goods (Mintz - Tulkens, 1986; Kanbur - Keen, 1993; Bordignon, 1995; Hamilton - Slutsky, 1997; Scharf, 1999) and on factors of production (Zodrow - Mietzkowsky, 1986 Wildasin, 1988; Bucotvesky, 1991; Wilson, 1986; 1991). We discuss the policy implications of these theoretical analyses, pointing out the empirical relevance of the fiscal relationship among regions in a federation (Besley - Case, 1995; Besley - Griffith - Klemm, 2001; Devereux - Lockwood - Redoano, 2002). We finally discuss some recent literature on the role of vertical externalities (Keen - Kotsogiannis, 2002; Rizzo, 2005) and interregional transfers (Wildasin, 1991; Dalbhy, 1996; Bucovetsky - Smart, 2002; Esteller-Moré - Solé-Ollé, 2002; Köthenburgen, 2002; Rizzo, 2003).