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Fiscal centralization versus decentralization: Growth and welfare effects of spillovers, Leviathan taxation, and capital mobility

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  • Chu, Angus C.
  • Yang, C.C.

Abstract

This paper develops an endogenous growth model with spillovers of public goods, Leviathan taxation, and mobile capital to examine the relative merits of centralized and decentralized fiscal systems for economic growth and social welfare. We show that a decentralized system dominates a centralized system in terms of economic growth; however, the difference in social welfare between a decentralized and a centralized system is non-monotonic and displays a hump-shaped relationship with respect to capital mobility. Since higher capital mobility induces stronger tax competition, this finding implies that there is an optimal degree of tax competition; some tax competition is desirable, but fierce tax competition may be harmful. We also show that there is a critical level of spillovers of public goods above which centralization dominates decentralization in terms of social welfare, as in previous studies; however, if spillovers are below this critical level, capital mobility also matters in the welfare comparison between centralized and decentralized systems.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 71 (2012)
Issue (Month): 2 ()
Pages: 177-188

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Handle: RePEc:eee:juecon:v:71:y:2012:i:2:p:177-188

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Web page: http://www.elsevier.com/locate/inca/622905

Related research

Keywords: Fiscal decentralization; Spillovers of public goods; Tax competition; Leviathan taxation;

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Cited by:
  1. Floriana Cerniglia & Riccarda Longaretti, 2013. "Federalism, education-related public good and growth when agents are heterogeneous," Journal of Economics, Springer, Springer, vol. 109(3), pages 271-301, July.
  2. Reingewertz, Yaniv, 2012. "Do municipal amalgamations work? Evidence from municipalities in Israel," Journal of Urban Economics, Elsevier, Elsevier, vol. 72(2), pages 240-251.

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