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Fiscal Capacity, Tax Effort, and Optimal Equalization Grants

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Author Info
B. Dahlby
L. S. Wilson

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Abstract

In this paper, the authors address the question of how the tax burden in a federation should be distributed across the different jurisdictions so that the social cost of providing government services is minimized. Using optimal tax theory, they derive formulas for the optimal equalization grants that equalize the social marginal cost of raising revenue across all provinces. The authors show how the optimal equalization grants are related to a measure of tax effort based on the marginal cost of public funds and a measure of fiscal capacity that takes into account the elasticity of the tax base and its substitutability with other tax bases.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 27 (1994)
Issue (Month): 3 (August)
Pages: 657-72
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Handle: RePEc:cje:issued:v:27:y:1994:i:3:p:657-72

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  1. HINDRIKS, Jean & PERALTA, Susana & WEBER, Shlomo, 2005. "Fiscal competition, revenue sharing, and policy-induced agglomeration," CORE Discussion Papers 2005093, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  2. Albert Solé-Ollé & Pilar Sorribas-Navarro, 2006. "The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain," Working Papers 2006-09, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  3. Diego Martínez-López, 2005. "Fiscal federalism and public inputs provision - vertical externalities matter," Working Paper Series 484, European Central Bank. [Downloadable!]
  4. Diego Martínez López, 2004. "Vertical externalities in the provision of public inputs," Economic Working Papers at Centro de Estudios Andaluces E2004/47, Centro de Estudios Andaluces. [Downloadable!]
  5. L. S. Wilson, 2003. "Equalization, Efficiency and Migration: Watson Revisited," Canadian Public Policy, University of Toronto Press, vol. 29(4), pages 385-395, December. [Downloadable!] (restricted)
  6. Thiess Buettner & Fédéric Holm-Hadulla, 2008. "Cities in Fiscal Equalization," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Michael Smart, 1996. "Taxation incentives and deadweight loss in a system of intergovernmental transfers," Working Papers msmart-96-03, University of Toronto, Department of Economics. [Downloadable!]
  8. Robin Boadway & Jean-Francois Tremblay, 2005. "A Theory of Vertical Fiscal Imbalance," Working Papers 2006-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  9. Jean, HINDRIKS & Susana , PERALTA & Sholmo , WEBER, 2005. "Fiscal competition, revenue sharing, and policy-induced agglomeration," Discussion Papers (ECON - Département des Sciences Economiques) 2005062, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
  10. Joan Rosselló, 2003. "Regional redistribution and growth," Investigaciones Economicas, Fundación SEPI, vol. 27(2), pages 369-392, May. [Downloadable!]
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