On states’ behavior with equalization grants
AbstractThis paper discusses how state government’s behaviour is affected when the so-called Representative Tax System (RTS) equalization scheme is implemented. In particular, we study the changes in the marginal cost of public funds (MCPF), and in the first order conditions for the optimal provision of public inputs. Following Smart (1998), those equalization transfers might create a price effect that induces the subnational governments to raise taxes. However, this result has to be qualified under certain assumptions. Also we find that there is an ambiguous relationship between the degree of fiscal equalization and the marginal cost of providing the public input and the level of taxation. In a sense, it is not clear that more redistribution necessarily leads to more inefficiency caused by higher taxes.
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Bibliographic InfoArticle provided by IEF in its journal Hacienda Pública Española/Revista de Economía Pública.
Volume (Year): 174 (2005)
Issue (Month): 3 (September)
Fiscal federalism; MCPF; vertical transfers;
Find related papers by JEL classification:
- H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
- H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
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