Optimal Taxation in a Federal System of Governments

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The analysis explores how implemented tax systems create distortions that reduce overall welfare, leading to excess burden or dead weight loss (DWL). It critiques traditional optimal taxation approaches for neglecting intergovernmental relations and assumes a single government level. The paper investigates how federal structures, characterized by multiple government levels, influence optimal tax policy decisions and the extent to which these structures can internalize the distortions associated with taxation.