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Revenue Sharing versus Expenditure Sharing in a Federal System

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Author Info
Charles Figuieres ()
Jean Hindriks ()
Gareth D. Myles ()

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Abstract

Problems of intergovernmental policy coordination can take many forms and are becoming increasingly important with continuing economic integration. In this paper we focus on the fiscal competition problem where the non-cooperative choice of taxes and transfers among governments typically leads to a suboptimal outcome. We look at the effect of two widely used corrective policies: revenue sharing and expenditure sharing (or intergovernmental matching grants). Our main result is that these two corrective policies have opposite effects depending on the form of competition between governments, namely whether governments compete in taxes or expenditures. More precisely, for any form of competition, revenue sharing is desirable exactly when expenditure sharing is not and vice versa. The implication is that the choice of the optimal corrective policy requires a complete understanding of the underlying non-cooperative behavior among governments. Our second main result is that neither revenue sharing or expenditure sharing can be sustained as a Nash equilibrium among governments, although all governments would benefit from one of these two corrective policies. Central intervention is therefore inevitable unless governments can pre-commit to the optimal corrective policy before setting their fiscal policies.

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

Volume (Year): 11 (2004)
Issue (Month): 2 (03)
Pages: 155-174
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Handle: RePEc:kap:itaxpf:v:11:y:2004:i:2:p:155-174

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References listed on IDEAS
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.:
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(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. VERDONCK, Magali, 2004. "A note on Kanbur and Keen : transfers to sustain fiscal cooperation," CORE Discussion Papers 2004002, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  2. Michel Mignolet & Marie-Eve Mulquin & Frédérique Denil, 2004. "Interregional differences in taxes and population mobility," ERSA conference papers ersa04p104, European Regional Science Association. [Downloadable!]
  3. Jacques H. DREZE & Charles FIGUIERES & Jean, HINDRIKS, 2006. "Vountary matching grants can forestall social dumping," Discussion Papers (ECON - Département des Sciences Economiques) 2006063, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  4. Lisa Grazzini & Alessandro Petretto, 2006. "Vertical Tax Competition with Tax Sharing and Equalization Grants," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(1), pages 75-94, May. [Downloadable!]
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