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Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment

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Author Info
Marko Koethenbuerger ()

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Abstract

Federal and state governments often differ in the capacity to pre-commit to expenditure and tax policy. Whether the implied sequence of public decisions has any efficiency implications is the subject of this paper. We resort to a setting which contrary to most of the literature does not exhibit a perfect tax-base overlap. We show that a federal government's pre-commitment capacity is welfare-improving. Efficiency, however, does not improve over all decision margins. The welfare-increasing policy entails a more distorted level of public consumption. Moreover, welfare may also improve if local governments are able to pre-commit towards the upper level. The rationale is that although federal transfers are formally unconditional they nevertheless entail a tax-price effect; thereby potentially counteracting incentives to engage in a “race to the bottom” in fiscal competition among local governments.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 2054.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2054

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Related research
Keywords: fiscal federalism commitment transfer policy tax competition common agency

Find related papers by JEL classification:
H10 - Public Economics - - Structure and Scope of Government - - - General
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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