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How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization

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  • Koethenbuerger, Marko

Abstract

Previous literature widely assumes that taxes are optimized in local public finance while expenditures adjust residually. This paper endogenizes the choice of the optimization variable. In particular, it analyzes how federal policy toward local governments' influences the way local governments decide on public policy. Unlike the usual presumption, the paper shows that local governments may choose to optimize over expenditures. The result holds when federal policy subsidizes local taxation. The results offer a new perspective of the efficiency implications of federal policy toward local governments and, thereby, enable a more precise characterization of local government behavior in fiscal federalism.

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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: 1516-1522

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1516-1522

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

Related research

Keywords: Tax vs. expenditure optimization; Federalism; Endogenous commitment; Fiscal incentives; Policy interaction;

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References

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Citations

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Cited by:
  1. Marko Koethenbuerger, 2010. "How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization," Working Papers 2010/29, Institut d'Economia de Barcelona (IEB).
  2. Koethenbuerger, Marko, 2014. "Competition for migrants in a federation: Tax or transfer competition?," Journal of Urban Economics, Elsevier, vol. 80(C), pages 110-118.
  3. Brülhart, Marius & Parchet, Raphaël, 2014. "Alleged tax competition: The mysterious death of bequest taxes in Switzerland," Journal of Public Economics, Elsevier, vol. 111(C), pages 63-78.
  4. Raphael Parchet, 2012. "Are Local Tax Rates Strategic Complements or Substitutes?," ERSA conference papers ersa12p313, European Regional Science Association.
  5. Hansjörg Blöchliger & José Maria Pinero Campos, 2011. "Tax Competition Between Sub-Central Governments," OECD Working Papers on Fiscal Federalism 13, OECD Publishing.
  6. Yutao Han, 2013. "Who benefits from partial tax coordination?," CREA Discussion Paper Series 13-24, Center for Research in Economic Analysis, University of Luxembourg.

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