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Efficiency and the optimal direction of federal-state transfers

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  • Robin Boadway
  • Michael Keen

Abstract

It seems to be widely believed that the case for centralising revenue-raising is stronger than that for centralising expenditure decisions, so that federal governments should typically make transfers to lower level "state" governments. This paper argues, however, that pure efficiency considerations may plausibly point in exactly the opposite direction. This arises becauses of a "vertical" fiscal externality: the typical state may neglect the impact that its tax decisions have on the federal tax base. The optimal federal response is to internalise this distortion of state decisions by means of offsetting subsidy on the common tax base, the financing of which may plausibly require transfers from the states.

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File URL: http://hdl.handle.net/10.1007/BF00399907
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Bibliographic Info

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

Volume (Year): 3 (1996)
Issue (Month): 2 (May)
Pages: 137-155

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Handle: RePEc:kap:itaxpf:v:3:y:1996:i:2:p:137-155

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: fiscal federalism; fiscal gap;

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References

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  1. Gordon, Roger H, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 567-86, November.
  2. Russell Krelove, 1992. "Efficient Tax Exporting," Canadian Journal of Economics, Canadian Economics Association, vol. 25(1), pages 145-55, February.
  3. Geoffrey Brennan & Jonathan Pincus, 1995. "A Minimalist Model of Federal Grants and Flypaper Effects," School of Economics Working Papers 1995-01, University of Adelaide, School of Economics.
  4. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  5. Robin W. Boadway & Michael Keen, 1994. "Efficiency and the Fiscal Gap in Federal Systems," Working Papers 915, Queen's University, Department of Economics.
  6. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
  7. Boadway, Robin, 1982. "On the Method of Taxation and the Provision of Local Public Goods: Comment," American Economic Review, American Economic Association, vol. 72(4), pages 846-51, September.
  8. Wellisch, Dietmar, 1994. "Interregional spillovers in the presence of perfect and imperfect household mobility," Journal of Public Economics, Elsevier, vol. 55(2), pages 167-184, October.
  9. Myers Gordon M. & Papageorgiou Yorgos Y., 1993. "Fiscal Inequivalence, Incentive Equivalence and Pareto Efficiency in a Decentralized Urban Context," Journal of Urban Economics, Elsevier, vol. 33(1), pages 29-47, January.
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