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On the states' behavior with equalization grants

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Author Info
Diego Martínez-López () (Centro de Estudios Andaluces y Univesidad Pablo de Olavide)

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Abstract

This paper discusses how the state government's behavior is affected when the so-called Representative Tax System (RTS) equalization scheme is implemented. In particular, we study the changes in the marginal cost of the public funds (MCPF), and in the first order conditions for the optimal provision of a public input. A reduction in the MCPF is to be expected when lump-sum grants are replaced by RTS equalization transfers. However, this result has to be qualified under certain assumptions. Also we find that there does not exist an unambiguous relationship between the degree of fiscal equalization and the marginal cost of providing the public input and the tax setting. Production efficiency condition in the provision of public inputs holds with both types of vertical transfers.

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Publisher Info
Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2005/03.

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Length: 16 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:cea:doctra:e2005_03

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Related research
Keywords: Fiscal federalism; MCPF; vertical transfers.;

Find related papers by JEL classification:
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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References listed on IDEAS
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  1. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May. [Downloadable!] (restricted)
  2. Bev Dahlby & Neil Warren, 2003. "Fiscal Incentive Effects of the Australian Equalisation System," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 434-445, December. [Downloadable!] (restricted)
  3. Matsumoto, Mutsumi, 2004. "The mix of public inputs under tax competition," Journal of Urban Economics, Elsevier, vol. 56(2), pages 389-396, September. [Downloadable!] (restricted)
  4. 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.
  5. Kotsogiannis, Christos & Makris, Miltiadis, 2002. "On production efficiency in federal systems," Economics Letters, Elsevier, vol. 76(2), pages 281-287, July. [Downloadable!] (restricted)
  6. James P. Feehan, 2002. "Distortionary Taxation and Optimal Public Spending on Productive Activities," Economic Inquiry, Oxford University Press, vol. 40(1), pages 60-68, January.
  7. Alejandro Esteller-Moré & Albert Solé-Ollé, 2002. "Tax Setting in a Federal System: The Case of Personal Income Taxation in Canada," International Tax and Public Finance, Springer, vol. 9(3), pages 235-257, May. [Downloadable!] (restricted)
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  8. Diego Martínez-López, 2005. "Fiscal federalism and public inputs provision - vertical externalities matter," Working Paper Series 484, European Central Bank. [Downloadable!]
  9. Buettner, Thiess, 2006. "The incentive effect of fiscal equalization transfers on tax policy," Journal of Public Economics, Elsevier, vol. 90(3), pages 477-497, February. [Downloadable!] (restricted)
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  10. Mutsumi Matsumoto, 2000. "A Note on the Composition of Public Expenditure under Capital Tax Competition," International Tax and Public Finance, Springer, vol. 7(6), pages 691-697, December. [Downloadable!] (restricted)
  11. 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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  12. Bucovetsky, Sam & Smart, Michael, 2002. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  13. Blackorby, Charles & Brett, Craig, 2000. "Fiscal Federalism Revisited," Journal of Economic Theory, Elsevier, vol. 92(2), pages 300-317, June. [Downloadable!] (restricted)
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  14. Christian Baretti & Bernd Huber & Karl Lichtblau, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," International Tax and Public Finance, Springer, vol. 9(6), pages 631-649, November. [Downloadable!] (restricted)
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