Taxing our neighbors? : why some sub-national revenues are so small

Abstract

This paper analyzes the determinants of local government revenues and the incentives faced by politicians in the design of tax policy. The decision of deepening local tax collections carries costs and benefits for local politicians. Balancing in the margin these costs and benefits allows for an endogenous determination of the taxing level. The paper stresses the role of markets size in determining politicians’ incentives to enact a tax regime. In addition, we provide a rationale for the central government-local government tax ratio as a key tax effort variable. Furthermore, local levels of income inequality are relevant in explaining tax collections.