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Fiscal Decentralization with Distortionary Taxation: Tiebout vs. Tax Competition

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Jan K. Brueckner ()

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Abstract

This paper explores a question that lies at the intersection of two vast literatures. The goal is to gauge whether the good side of fiscal decentralization, as emphasized by the Tiebout literature, dominates the bad side, as studied in the tax-competition literature. The results, which are derived by numerical simulation, show that either answer to this question is possible. Under favorable conditions, where the curvature of the production function and the dispersion of preferences are both high, the gains from Tiebout sorting are likely to outweigh the loss from the capital-tax distortion, so that the good side of fiscal decentralization dominates. If either of these conditions is absent, however, the bad side can win, making decentralization undesirable. When this happens, the lessons of the Tiebout tradition are overturned, with economic efficiency requiring centralized rather than decentralized provision of public goods.

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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 11 (2004)
Issue (Month): 2 (03)
Pages: 133-153
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Handle: RePEc:kap:itaxpf:v:11:y:2004:i:2:p:133-153

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416. [Downloadable!] (restricted)
  2. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May. [Downloadable!] (restricted)
  3. Brown, Charles C. & Oates, Wallace E., 1987. "Assistance to the poor in a federal system," Journal of Public Economics, Elsevier, vol. 32(3), pages 307-330, April. [Downloadable!] (restricted)
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  4. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November. [Downloadable!] (restricted)
  5. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September. [Downloadable!] (restricted)
  6. Wilson John Douglas, 1995. "Mobile Labor, Multiple Tax Instruments, and Tax Competition," Journal of Urban Economics, Elsevier, vol. 38(3), pages 333-356, November. [Downloadable!] (restricted)
  7. Pauly, Mark V., 1973. "Income redistribution as a local public good," Journal of Public Economics, Elsevier, vol. 2(1), pages 35-58, February. [Downloadable!] (restricted)
  8. Scotchmer, Suzanne & Wooders, Myrna Holtz, 1987. "Competitive equilibrium and the core in club economies with anonymous crowding," Journal of Public Economics, Elsevier, vol. 34(2), pages 159-173, November. [Downloadable!] (restricted)
  9. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March. [Downloadable!] (restricted)
  10. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October. [Downloadable!] (restricted)
  11. Hochman, Oded & Pines, David & Thisse, Jacques-Francois, 1995. "On the Optimal Structure of Local Governments," American Economic Review, American Economic Association, vol. 85(5), pages 1224-40, December. [Downloadable!] (restricted)
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  12. Ellingsen, Tore, 1998. "Externalities vs internalities: a model of political integration," Journal of Public Economics, Elsevier, vol. 68(2), pages 251-268, May. [Downloadable!] (restricted)
  13. Henderson, J Vernon, 1985. "The Tiebout Model: Bring Back the Entrepreneurs," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 248-64, April. [Downloadable!] (restricted)
  14. Henderson, J. Vernon, 1994. "Community choice of revenue instruments," Regional Science and Urban Economics, Elsevier, vol. 24(2), pages 159-183, April. [Downloadable!] (restricted)
  15. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March. [Downloadable!] (restricted)
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  16. Alesina, Alberto & Spolaore, Enrico, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1027-56, November.
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  17. Vernon Henderson, J., 1995. "Will homeowners impose property taxes?," Regional Science and Urban Economics, Elsevier, vol. 25(2), pages 153-181, April. [Downloadable!] (restricted)
  18. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September. [Downloadable!] (restricted)
  19. Lee, Kangoh, 1998. "Uncertain income and redistribution in a federal system," Journal of Public Economics, Elsevier, vol. 69(3), pages 413-433, September. [Downloadable!] (restricted)
  20. Epple, Dennis & Romer, Thomas, 1991. "Mobility and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 828-58, August. [Downloadable!] (restricted)
  21. Berglas, Eitan & Pines, David, 1980. "Clubs as a case of competitive industry with goods of variable quality," Economics Letters, Elsevier, vol. 5(4), pages 363-366. [Downloadable!] (restricted)
  22. Mintz, Jack & Tulkens, Henry, 1986. "Commodity tax competition between member states of a federation: equilibrium and efficiency," Journal of Public Economics, Elsevier, vol. 29(2), pages 133-172, March. [Downloadable!] (restricted)
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  23. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jan K. Brueckner, 2005. "Fiscal Federalism and Economic Growth," Working Papers 050612, University of California-Irvine, Department of Economics. [Downloadable!]
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