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Both federal and provincial governments in Canada levy corporate taxes on businesses in their jurisdictions, which potentially gives rise to horizontal and vertical tax externalities within the federation. Using a simple model of interdependent tax choices, we estimate tax-setting functions for the federal government, Ontario, Quebec, and an aggregate of the remaining eight provinces. We find evidence of significant vertical and horizontal tax interactions. Provincial tax rates respond negatively to the federal tax rate, while at least some provinces increase their tax rates in response to increases in the tax rates of other provinces. JEL Classification: H25, H7 Une analyse empirique de l'interaction fiscale entre gouvernements: le cas des impôts sur les revenus d'affaires au Canada. Au Canada, les gouvernements fédéral et provinciaux collectent des impôts sur le revenu de sociétés sous leur jurisdiction. Voilà qui peut donner lieu à des effets externes horizontaux et verticaux à l'intérieur de la fédération. A l'aide d'un modèle de choix fiscaux interdépendants, les auteurs calibrent les fonctions d'imposition du gouvernement fédéral, des gouvernements du Québec et de l'Ontario, et d'une entité composée des huit autres provinces. On montre que les effets verticaux et horizontaux d'interaction fiscale sont significatifs. Les taux d'imposition des provinces réagissent négativement au taux d'imposition fédéral, mais certaines provinces accroissent leur taux d'imposition en réponse à des accroissements dans les taux d'imposition d'autres provinces.
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This paper examines the properties of the optimal nonlinear income tax when preferences are quasi-linear in leisure and individuals differ in their ability and their preferences for leisure. The government seeks to redistribute income. It can perfectly observe the level of endogenous income but cannot observe either ability or preferences. The heterogeneity of preferences leads to problems of comparability between individual utilities which challenge the design of redistributive schemes. We analyze the consequences of adopting a utilitarian social welfare function where the government is allowed to give different weights to individuals with different preferences. Under this particular social objective and given the quasi-linearity of preferences, we are able to obtain closed-form solutions for the marginal tax rates and to examine the progressivity of the tax system according to the weights used. Copyright Blackwell Publishing, Inc. 2002.
Tax and expenditure policies are studied in a federation with imperfectly mobile households. States implement a linear progressive tax and supply a public good. A vertical scal externality, re ecting the e ect of state policies on federal revenues, provides an incentive for state taxes to be too progressive. A horizontal scal externality causes non-optimal states taxes and expenditures because of the migration e ect. The federal government implements its own linear progressive tax and makes transfers to the states. The federal government can nullify both externalities by appropriate scal policies, and redistributive taxation can be decentralized to the states.
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