Incentives underlying tax policies in a decentralized federation with horizontal leadership and transboundary environmental damage

摘要

This paper concerns income- and production taxation in a decentralized fiscal federalism model where the ability to commit differs among member countries. It is assumed that the federal government dictates environmental targets to be implemented at the national level, where the horizontal leader has commitment power vis-à-vis the other country (the follower). The results show how incentives underlying the horizontal leader’s tax policies are influenced by the decision structure.