Intergovernmental Fiscal Relations: the Efficiency Effect of Taxes, Transfers and Fiscal Illusion
AbstractThe purpose of this paper is to evaluate the efficiency cost of transfers. To this end, we develop a model of individual demand decisions about the provision of a regional public good that encompasses a continuum of tax/transfers scenarios to finance regional public expenditure. We assume that individuals have identical quasi-linear preferences defined over private consumption and the regional public good, that endowment income varies between individuals and regions and that regions have different predetermined sizes. We show that, despite its simplicity, this model is capable of discriminating the efficiency properties of the different scenarios considered, and that the substitution of transfers for own regional taxes always raises the provision of the regional public good. Our model yields the so called “flypaper effect” with no need to appeal to the existence of “fiscal illusion” by the part of the individual. We nevertheless find that “fiscal illusion” increases the elasticity of public good provision with respect to transfers, and we suggest two potentially refutable hypotheses to identify the existence of this phenomenon.
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Bibliographic InfoPaper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper1229.
Length: 36 pages
Date of creation: 19 Sep 2012
Date of revision:
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Web page: http://aysps.gsu.edu/isp/index.html
Regional finance; taxes; transfers; fiscal illusion; flypaper effect;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-30 (All new papers)
- NEP-GEO-2012-09-30 (Economic Geography)
- NEP-PBE-2012-09-30 (Public Economics)
- NEP-PUB-2012-09-30 (Public Finance)
- NEP-URE-2012-09-30 (Urban & Real Estate Economics)
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.:
- Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, December.
- Antoni Zabalza & Julio Lopez-Laborda, 2011.
"The New Spanish System of Intergovernmental Transfers,"
International Center for Public Policy Working Paper Series, at AYSPS, GSU
paper1103, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
- Antoni Zabalza & Julio López-Laborda, 2011. "The new Spanish system of intergovernmental transfers," International Tax and Public Finance, Springer, vol. 18(6), pages 750-786, December.
- Antoni Zabalza & Julio Lopez-Laborda, 2010. "The New Spanish System of Intergovernmental Transfers," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1033, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
- Fisher, Ronald C., 1982. "Income and grant effects on local expenditure: The flypaper effect and other difficulties," Journal of Urban Economics, Elsevier, vol. 12(3), pages 324-345, November.
- Bird, Richard M., 1993. "Threading the Fiscal Labyrinth: Some Issues in Fiscal Decentralization," National Tax Journal, National Tax Association, vol. 46(2), pages 207-27, June.
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