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Fiscal Capacity Equalization and Economic Efficiency

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  • Jeff Petchey
  • Sophia Levtchenkova

Abstract

Fiscal capacity equalisation, at least of the type implemented in Australia, is shown to link regions together through a grant distribution formula that creates an incentive for regions to act strategically in order to influence the size of their grant. This behaviour distorts the provision of local public goods away from optimal levels of provision by changing regional perceptions of the marginal benefit from local public good provision. In addition, the inter-regional transfer of income that occurs with equalisation leads to inefficiency in the spatial allocation of mobile factors of production. As a result, we conclude that equalisation may create economic inefficiency, and lead to a lower level of social welfare.

Suggested Citation

  • Jeff Petchey & Sophia Levtchenkova, 2004. "Fiscal Capacity Equalization and Economic Efficiency," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0415, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:ays:ispwps:paper0415
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    File URL: http://icepp.gsu.edu/files/2015/03/ispwp0415.pdf
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    References listed on IDEAS

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    1. Jeffrey Petchey & Perry Shapiro, 2000. "The Efficiency of State Taxes on Mobile Labour Income," The Economic Record, The Economic Society of Australia, vol. 76(234), pages 285-296, September.
    2. Petchey, Jeffrey & Shapiro, Perry, 2000. "The Efficiency of State Taxes on Mobile Labour Income," The Economic Record, The Economic Society of Australia, vol. 76(234), pages 285-296, September.
    3. Myers, Gordon M., 1990. "Optimality, free mobility, and the regional authority in a federation," Journal of Public Economics, Elsevier, vol. 43(1), pages 107-121, October.
    4. 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 613-633, November.
    5. Petchey, Jeffrey D & Shapiro, Perry, 2002. "State Tax and Policy Competition for Mobile Capital," The Economic Record, The Economic Society of Australia, vol. 78(241), pages 175-185, June.
    6. Jeffrey D. Petchey & Perry Shapiro, 2002. "State Tax and Policy Competition For Mobile Capital," The Economic Record, The Economic Society of Australia, vol. 78(241), pages 175-185, June.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Richard Bird & François Vaillancourt, 2007. "Expenditure-Based Equalization Transfers," Springer Books, in: Jorge Martinez-Vazquez & Bob Searle (ed.), Fiscal Equalization, chapter 0, pages 259-289, Springer.
    2. repec:rre:publsh:v:35:y:2005:i:1:p:38-63 is not listed on IDEAS

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    More about this item

    Keywords

    fiscal equalisation; revenue needs; expenditure needs; local public goods; Nash equilibrium; labour mobility; fiscal externalities; economic rents.;
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