The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions
AbstractThis paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments, regardless of a wide variety of differences in regional tax capacity, tastes for public spending, and population. Thus, compared to other corrective devices, equalization achieves “robust” implementation. If aggregate tax bases are elastic, however, equalization leads to excessive taxation. Efficiency can be achieved by a modified formula that equalizes a fraction of local revenue deficiencies equal to the fraction of taxes that are shifted backward to factor suppliers.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 767.
Date of creation: 2002
Date of revision:
tax competition; intergovernmental grants;
Other versions of this item:
- Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, 01.
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- Heizt der Finanzausgleich den Steuerwettbewerb an?
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