Shared tax sources and public expenditures

This paper deals with a specific vertical assignment of public functions in a federation: Two levels of government share both the same tax source and expenditure on a productivity increasing public service. We consider surplu s maximizing Leviathan governments which provide public services in order t o increase their potential tax base. The Nash equilibrium is characterized by overtaxation and relative to surplus maximization-depending on whether o r not the public goods are sufficiently complementary with the entire tax b ase-either underprovision or overprovision of the public service. The impli cations of these results, in terms of welfare and potential use for earmark ing taxes are also considered.