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Fiscal Decentralization in Developing Countries: The Effects of Local Corruption and Tax Evasion

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  • Jan K. Brueckner

    (Department of Economics and Institute of Government and Public Affairs, University of Illinois at Urbana-Champaign)

Abstract

A movement toward fiscal decentralization is underway in many countries across the world. This movement is partly justified by appeal to the classic argument of Tiebout (1956), who claimed that decentralized provision of public goods allows better fulfillment of diverse individual demands. Many commentators, however, have expressed concern that the conditions justifying Tiebout's argument are not present in many developing countries. This paper analyzes the consequences of altering Tiebout's model to include local corruption and tax evasion, which may exist in many developing countries. The analysis shows that these forces indeed limit the benefits from fiscal decentralization. By raising public-good costs, corruption cancels some of the gains from better demand fulfillment, which arise as Tiebout sorting generates homogeneous local jurisdictions. By creating incentives for mixing, thereby preventing formation of homogeneous communities, tax evasion may block the operation of the Tiebout mechanism, eliminating the gains from fiscal decentralization.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 1 (2000)
Issue (Month): 1 (May)
Pages: 1-18

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Handle: RePEc:cuf:journl:y:2000:v:1:i:1:p:1-18

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Keywords: Fiscal decentralization; Corruption; Tax evasion;

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References

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  1. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 323-338, November.
  2. Tao Zhang & Heng-fu Zou, 1996. "Fiscal decentralization, public spending, and economic growth in China," Policy Research Working Paper Series, The World Bank 1608, The World Bank.
  3. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, National Tax Association, vol. 46(2), pages 237-43, June.
  4. Danyang Xie & Heng-fu Zou & Hamid Davoodi, 1999. "Fiscal Decentralization and Economic Growth in the United States," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 109, China Economics and Management Academy, Central University of Finance and Economics.
  5. Brueckner, Jan K, 1999. " Fiscal Federalism and Capital Accumulation," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 1(2), pages 205-24.
  6. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 64, pages 416.
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Citations

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Cited by:
  1. Lars P. Feld & Gebhard Kirchgässner & Christoph A. Schaltegger, 2004. "Fiscal Federalism and Economic Performance: Evidence from Swiss Cantons," Marburg Working Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200420, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Jin, Jing & Zou, Heng-fu, 2002. "How does fiscal decentralization affect aggregate, national, and subnational government size?," Journal of Urban Economics, Elsevier, vol. 52(2), pages 270-293, September.
  3. Rajeev K. Goel & Michael A. Nelson, 2010. "Decentralization of the Size and Scope of Local Governments and Corruption," Working Papers CEB, ULB -- Universite Libre de Bruxelles 10-031, ULB -- Universite Libre de Bruxelles.
  4. Lessmann, Christian & Markwardt, Gunther, 2009. "Aid, growth and decentralization," Dresden Discussion Paper Series in Economics, Dresden University of Technology, Faculty of Business and Economics, Department of Economics 09/09, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  5. Jing Jin & Chunli Shen & Heng-fu Zou, 2012. "Fiscal Decentralization and Peasants' Financial Burden in China," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 13(1), pages 53-90, May.
  6. Christian Lessmann & Gunther Markwardt, 2010. "Decentralization and Foreign Aid Effectiveness: Do Aid Modality and Federal Design Matter in Poverty Alleviation?," CESifo Working Paper Series, CESifo Group Munich 3035, CESifo Group Munich.
  7. Jing Jin & Heng-fu Zou, 2005. "Fiscal decentralization, revenue and expenditure assignments, and growth in China," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 212, China Economics and Management Academy, Central University of Finance and Economics.
  8. Michael A. Nelson, 2012. "Corruption and the Size of Local Governments: Are They Related?," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1210, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  9. Wang, Zhiguo & Ma, Liang, 2012. "New Development of Fiscal Decentralization in China," MPRA Paper 36918, University Library of Munich, Germany.
  10. Lars P. Feld & Horst Zimmermann & Thomas Döring, 2003. "Föderalismus, Dezentralität und Wirtschaftswachstum," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, DIW Berlin, German Institute for Economic Research, vol. 72(3), pages 361-377.
  11. Lessmann, Christian & Markwardt, Gunther, 2012. "Aid, Growth and Devolution," World Development, Elsevier, Elsevier, vol. 40(9), pages 1723-1749.
  12. Zhiguo Wang & Liang Ma, 2014. "Fiscal Decentralization in China: A Literature Review," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 15(1), pages 51-65, May.
  13. Lars P. Feld & Horst Zimmermann & Thomas Döring, 2004. "Federalism, Decentralization, and Economic Growth," Marburg Working Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200430, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  14. Goel, Rajeev K. & Nelson, Michael A., 2010. "Causes of corruption: History, geography and government," Journal of Policy Modeling, Elsevier, Elsevier, vol. 32(4), pages 433-447, July.
  15. repec:spo:wpecon:info:hdl:2441/53r60a8s3kup1vc9k2cag6dp8 is not listed on IDEAS
  16. Denis Nitikin & Chunli Shen & Qian Wang & Heng-fu Zou, 2011. "Land Taxation in China: Assessment of Prospects for Politically and Economically Sustainable Reform," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 431, China Economics and Management Academy, Central University of Finance and Economics.

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