The Allocation of the Income Tax among Different Levels of Government: a Theoretical Solution

• DOI: 10.1332/251569207x15664516463934
• Publication Date: 2019-12-14T04:44:08Z
• Authors: Ferruccio Ponzano
• Keywords: jel:D72; jel:H71; jel:H11; jel:H77; jel:H21

The aim of this paper is to show how two competitive governments can simultaneously choose their income taxes. There are two tiers of government in competition. The problem is analysed using the Leviathan hypothesis and the theory of incomplete contracts. We assume that a government includes its re-election in its utility function and study the allocation of the income tax rates between the two tiers, free from any regulatory constraint. We show that the governments are interested in meeting the re-election constraint, but this common interest does not generate an egalitarian allocation of the tax revenues.