Vertical Tax Research Articles

Fiscal externalities and the design of intergovernmental grants

This paper describes the tax and expenditure externalities that can occur in a federation, focusing on the (relatively neglected) vertical tax and expenditure externalities which arise when state governments' tax and expenditure decisions affect the federal government's budget constraint and vice versa. Formulas are derived for matching grants which correct the distortions in governments' decision-making caused by fiscal externalities. With vertical tax externalities, the matching revenue grant may result in transfers from the state government to the federal government. With vertical expenditure externalities, the federal government should provide a matching expenditure grant equal to the additional federal revenue that is generated from an additional dollar spent by a state on productivityenhancing activities such as education.

VERTICAL INEQUITY IN THE TAXATION OF REAL PROPERTY

This study examines the issue vertical inequity in the taxation of real property. Vertical inequity may be regressive (progressive) if the assessed value/market value ratio decreases (increases) as market values increase for properties of the same classification. The literature presents several models to measure for vertical tax inequity. This study uses a 1991 sample of owner-occupied residential properties for Miami, Florida, to test for vertical inequity and to compare the various estimation models. The results are mixed. The Paglin and Fogarty, Cheng, Bell, and IAAO models show a regressive inequity. The piecewise spline model shows a regressive tax for the middle segment of the data. The Köchin and Parks model and the Clapp model show a progressive inequity. Where appropriate, the models account for time by using a constant-quality Miami house price index estimated using a repeat-sale method.

The Problem of Agricultural Taxation in West Pakistan and an Alternative Solution: A Comment (Notes & Comments)

In the Summer 1973 issue of the Pakistan Development Review, Mr. Mohammad Ghaffar Chaudhry [1] has dealt with two very important issues relating to the intersectoral tax equity and the intrasectoral tax equity within the agricultural sector in Pakistan. Using a simple criterion for vertical tax equity that implies that the tax rate rises with per capita income such that the ratio of revenue to income rises at the same percentage rate as per capita income, Mr. Chaudhry found that the agricultural sector is overtaxed in Pakistan. Mr. Chaudhry further found that the land tax is a regressive levy with respect to the farm size. Both findings, if valid, have important policy implications. In this note we argue that the validity of the findings on intersectoral tax equity depends on the treatment of water rate as tax rather than the price of a service provided by the Government and on the shifting assumptions regard¬ing the indirect taxes on imports and domestic production levied by the Central Government. The relevance of the findings on the intrasectoral tax burden would have been more obvious if the tax liability was related to income from land per capita.