Incomplete Information in Tax Setting of Local;Governments: a Theoretical Framework
In the literature, tax interaction is mainly due to tax and yardstick;competition. However, we suppose that tax interaction appears when the;local policy maker conforms his fiscal policy to decisions taken by his;neighbourhood to fill information gaps. Theoretical results show that;incomplete information leads to tax mimicking and a higher level of tax;rate. Moreover, leviathan governments are more sensitive than;benevolent ones to changes in neighbours tax rates (horizontal tax;interaction) but less to changes in the central government tax rate;(vertical tax interaction). Finally, there is no tax rate internalization;effects because an increase in the central government tax rate is not;followed by an equivalent decrease of local government tax rate.
incomplete information, informative trend, political trend, tax mimicking
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