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Fiscal Externalities and Efficient Transfers in a Federation

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Author Info
Motohiro Sato
Abstract

This paper investigates properties of the second best allocation in a fiscal federal system in which both federal tax and intergovernmental grants are involved and the taxation is distortionary. Also, optimal federal grants and tax policies in a decentralized fiscal system are examined. Our major findings are: (i) the second best does not require the equalization of marginal cost of public funds across regions in a conventional form; (ii) matching grants based on either the local tax rates or tax revenues should be introduced to internalize the tax externality; and (iii) once lump-sum and matching grants are optimized, federal tax policy becomes redundant so the optimal fiscal gap is indeterminate. Copyright Kluwer Academic Publishers 2000

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File URL: http://hdl.handle.net/10.1023/A:1008709203069
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Publisher Info
Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 7 (2000)
Issue (Month): 2 (March)
Pages: 119-139
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Handle: RePEc:kap:itaxpf:v:7:y:2000:i:2:p:119-139

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Related research
Keywords: tax externality; equalization of MCPFs; matching grants; optimal fiscal gap;

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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.:
  1. Burbidge, John B. & Myers, Gordon M., 1994. "Population mobility and capital tax competition," Regional Science and Urban Economics, Elsevier, vol. 24(4), pages 441-459, August. [Downloadable!] (restricted)
  2. John B. Burbidge & Gordon M. Myers, 1994. "Redistribution within and across the Regions of a Federation," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 620-36, August. [Downloadable!] (restricted)
  3. David E. Wildasin, 1994. "Income Redistribution and Migration," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 637-56, August. [Downloadable!] (restricted)
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  4. Wildasin, David E., 1983. "The welfare effects of intergovernmental grants in an economy with independent jurisdictions," Journal of Urban Economics, Elsevier, vol. 13(2), pages 147-164, March. [Downloadable!] (restricted)
  5. Johnson, William R, 1988. "Income Redistribution in a Federal System," American Economic Review, American Economic Association, vol. 78(3), pages 570-73, June. [Downloadable!] (restricted)
  6. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
  7. Wellisch, Dietmar & Wildasin, David E., 1996. "Decentralized income redistribution and immigration," European Economic Review, Elsevier, vol. 40(1), pages 187-217, January. [Downloadable!] (restricted)
  8. Buchanan, James M. & Goetz, Charles J., 1972. "Efficiency limits of fiscal mobility: An assessment of the tiebout model," Journal of Public Economics, Elsevier, vol. 1(1), pages 25-43, April. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
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  10. Boadway, Robin W & Wildasin, David E, 1990. "Optimal Tax-Subsidy Policies for Industrial Adjustment to Uncertain Shocks," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 105-34, January. [Downloadable!] (restricted)
  11. Gilbert, Guy & Picard, Pierre, 1996. "Incentives and optimal size of local jurisdictions," European Economic Review, Elsevier, vol. 40(1), pages 19-41, January. [Downloadable!] (restricted)
  12. Boadway, R & Keen, M, 1996. "Efficiency and the optimal direction of federal-state transfers," IFS Working Papers W96/01, Institute for Fiscal Studies.
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  13. Robin Boadway & Maurice Marchand & Marianne Vigneault, 1997. "The Consequences of Overlapping Tax Bases for Redistribution and Public Spending in a Federation," Working Papers 963, Queen's University, Department of Economics. [Downloadable!]
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  14. 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. [Downloadable!] (restricted)
  15. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March. [Downloadable!] (restricted)
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  16. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127 Elsevier. [Downloadable!] (restricted)
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  17. 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. [Downloadable!] (restricted)
  18. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July. [Downloadable!] (restricted)
  19. Mansoorian, Arman & Myers, Gordon M., 1997. "On the consequences of government objectives for economies with mobile populations," Journal of Public Economics, Elsevier, vol. 63(2), pages 265-281, January. [Downloadable!] (restricted)
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  20. Mansoorian, Arman & Myers, Gordon M., 1993. "Attachment to home and efficient purchases of population in a fiscal externality economy," Journal of Public Economics, Elsevier, vol. 52(1), pages 117-132, August. [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. Marko Koethenbuerger, 2007. "Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Lisa Grazzini & Alessandro Petretto, 2007. "Voting on Devolution in a Federal Country with a Bicameral National System," Working Papers Series wp2007_09, Universita' degli Studi di Firenze, Dipartimento di Scienze Economiche. [Downloadable!]
  3. Diego Martínez López, 2004. "Vertical externalities in the provision of public inputs," Economic Working Papers at Centro de Estudios Andaluces E2004/47, Centro de Estudios Andaluces. [Downloadable!]
  4. Aronsson, Thomas & Blomquist, Sören & Micheletto, Luca, 2007. "Where Should the Elderly Live and Who Should Pay for their Care? A Study in Demographics and Geographical Economics," Working Paper Series 2007:6, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  5. 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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