Ad Valorem Taxes and the Fiscal Gap in Federations
Paper number: 07/03
Paper date: July 2007
Paper Category: Working Paper
Christos Kotsogiannis and Diego Martinez
This paper investigates the implications of vertical fiscal externalities for the optimal federal tax and the sign of fiscal gap in the presence of ad valorem taxation. It is shown that the federal government can always achieve the second-best optimum for public good provision. The sign of the fiscal gap is, in general, ambiguous. The consequence of this is that a precise evaluation of the fiscal gap requires an explicit consideration of the underlying fundamentals of the federal economy.