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Optimal taxation and risk-sharing arrangements in an economic federation

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  • Thomas Aronsson
  • Magnus Wikstrom
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    Abstract

    This paper analyzes optimal taxation and risk-sharing arrangements in an economy with two levels of government. Both levels provide public goods and finance their expenditures via labor income taxation, where the tax base is responsive to the private agents' labor supply decisions. The localities are assumed to experience different random productivity shocks, meaning that the private labor supply decision as well as the choices of income tax rates are carried out under uncertainty. Part of the central government's decision problem is then to provide tax revenue sharing between the local governments. The optimal degree of revenue sharing depends on whether or not the localities-regions differ with respect to labor supply incentives. Copyright 2003, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Oxford Economic Papers.

    Volume (Year): 55 (2003)
    Issue (Month): 1 (January)
    Pages: 104-120

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    Handle: RePEc:oup:oxecpp:v:55:y:2003:i:1:p:104-120

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    Cited by:
    1. Thomas Aronsson & S�Ren Blomquist, 2008. "Redistribution and Provision of Public Goods in an Economic Federation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 125-143, 02.
    2. Lindahl, Erica & Westermark, Andreas, 2006. "Soft Budget Constraints as a Risk Sharing Arrangement in an Economic Federation," Working Paper Series 2006:5, Uppsala University, Department of Economics.
    3. Blomquist, Sören & Micheletto, Luca, 2004. "Redistribution, In-Kind Transfers and Matching Grants when the Federal Government Lacks Information on Local Costs," Working Paper Series 2004:15, Uppsala University, Department of Economics.

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