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Optimal fiscal federalism in the presence of tax competition

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  • Janeba, Eckhard
  • Wilson, John Douglas

Abstract

This paper models the optimal division of public goods provision between central and regional governments in an economy with interregional tax competition. Regional provision is inefficient because governments compete for scarce capital by lowering their capital taxes and public good levels to inefficiently low levels. On the other hand, central provision is inefficient because it is determined by the minimum winning coalition within a legislature. The optimal degree to which public good provision should be decentralized depends on a tradeoff between these inefficiencies. In our main model, complete centralization is never optimal: regional governments should supply some public goods.

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Bibliographic Info

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

Volume (Year): 95 (2011)
Issue (Month): 11 ()
Pages: 1302-1311

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1302-1311

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: Tax competition; Federalism; Public goods; Capital tax;

References

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  1. Cheikbossian, Guillaume, 2008. "Rent-seeking, spillovers and the benefits of decentralization," Journal of Urban Economics, Elsevier, vol. 63(1), pages 217-228, January.
  2. Brueckner, Jan K., 2000. "A Tiebout/tax-competition model," Journal of Public Economics, Elsevier, vol. 77(2), pages 285-306, August.
  3. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 313-337.
  4. Horst Raff & John Wilson, 1997. "Income Redistribution with Well-Informed Local Governments," International Tax and Public Finance, Springer, vol. 4(4), pages 407-427, November.
  5. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
  6. Robert A.J. Dur & Hein J. Roelfsema, 2002. "Why does Centralisation fail to internalise Policy Externalities?," Tinbergen Institute Discussion Papers 02-056/3, Tinbergen Institute, revised 11 Nov 2003.
  7. Kessler, Anke S & Lulfesmann, Christoph & Myers, Gordon M, 2002. "Redistribution, Fiscal Competition, and the Politics of Economic Integration," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 899-923, October.
  8. John Douglas Wilson & Roger H. Gordon, 2003. "Expenditure Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 399-417, 04.
  9. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  10. Wilson John Douglas, 1995. "Mobile Labor, Multiple Tax Instruments, and Tax Competition," Journal of Urban Economics, Elsevier, vol. 38(3), pages 333-356, November.
  11. John Wilson & Eckhard Janeba, 2003. "Decentralization and International Tax Competition," CESifo Working Paper Series 854, CESifo Group Munich.
  12. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
  13. Wilson, John Douglas, 2005. "Welfare-improving competition for mobile capital," Journal of Urban Economics, Elsevier, vol. 57(1), pages 1-18, January.
  14. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
  15. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  16. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  17. Eckhard Janeba & Guttorm Schjelderup, 2009. "The Welfare Effects of Tax Competition Reconsidered: Politicians and Political Institutions," Economic Journal, Royal Economic Society, vol. 119(539), pages 1143-1161, 07.
  18. John William Hatfield & Gerard Padr├│ i Miquel, 2008. "A Political Economy Theory of Partial Decentralization," NBER Working Papers 14628, National Bureau of Economic Research, Inc.
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Cited by:
  1. Oliver Lorz & Gerald Willmann, 2013. "Size versus scope: on the trade-off facing economic unions," International Tax and Public Finance, Springer, vol. 20(2), pages 247-267, April.

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