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Fiscal Decentralization in Developing Countries: The Effects of Local Corruption and Tax Evasion

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Author Info

  • Jan K. Brueckner

    (Department of Economics and Institute of Government and Public Affairs, University of Illinois at Urbana-Champaign)

Abstract

A movement toward fiscal decentralization is underway in many countries across the world. This movement is partly justified by appeal to the classic argument of Tiebout (1956), who claimed that decentralized provision of public goods allows better fulfillment of diverse individual demands. Many commentators, however, have expressed concern that the conditions justifying Tiebout's argument are not present in many developing countries. This paper analyzes the consequences of altering Tiebout's model to include local corruption and tax evasion, which may exist in many developing countries. The analysis shows that these forces indeed limit the benefits from fiscal decentralization. By raising public-good costs, corruption cancels some of the gains from better demand fulfillment, which arise as Tiebout sorting generates homogeneous local jurisdictions. By creating incentives for mixing, thereby preventing formation of homogeneous communities, tax evasion may block the operation of the Tiebout mechanism, eliminating the gains from fiscal decentralization.

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Bibliographic Info

Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 1.

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Length: 18 pages
Date of creation: May 1999
Date of revision: Apr 2000
Publication status: Published in Annals of Economics and Finance, May 2000, pages 1-18
Handle: RePEc:cuf:wpaper:1

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Web page: http://cema.cufe.edu.cn/
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Related research

Keywords: Fiscal decentralization; Corruption; Tax evasion;

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References

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  1. Tao Zhang & Heng-fu Zou, 1996. "Fiscal decentralization, public spending, and economic growth in China," Policy Research Working Paper Series 1608, The World Bank.
  2. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
  3. Danyang Xie & Heng-fu Zou & Hamid Davoodi, 1999. "Fiscal Decentralization and Economic Growth in the United States," CEMA Working Papers 109, China Economics and Management Academy, Central University of Finance and Economics.
  4. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  5. Brueckner, Jan K, 1999. " Fiscal Federalism and Capital Accumulation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(2), pages 205-24.
  6. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
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Citations

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Cited by:
  1. Denis Nitikin & Chunli Shen & Qian Wang & Heng-fu Zou, 2011. "Land Taxation in China: Assessment of Prospects for Politically and Economically Sustainable Reform," CEMA Working Papers 431, China Economics and Management Academy, Central University of Finance and Economics.
  2. Lars P. Feld & Horst Zimmermann & Thomas Döring, 2003. "Föderalismus, Dezentralität und Wirtschaftswachstum," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 72(3), pages 361-377.
  3. Jing Jin & Heng-fu Zou, 2004. "Fiscal decentralization, revenue and expenditure assignments, and growth in China," CEMA Working Papers 169, China Economics and Management Academy, Central University of Finance and Economics.
  4. Zhiguo Wang & Liang Ma, 2014. "Fiscal Decentralization in China: A Literature Review," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 51-65, May.
  5. Lars P. Feld & Horst Zimmermann & Thomas Döring, 2004. "Federalism, Decentralization, and Economic Growth," Marburg Working Papers on Economics 200430, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  6. Lessmann, Christian & Markwardt, Gunther, 2012. "Aid, Growth and Devolution," World Development, Elsevier, vol. 40(9), pages 1723-1749.
  7. repec:spo:wpecon:info:hdl:2441/53r60a8s3kup1vc9k2cag6dp8 is not listed on IDEAS
  8. Rajeev K. Goel & Michael A. Nelson, 2010. "Decentralization of the Size and Scope of Local Governments and Corruption," Working Papers CEB 10-031, ULB -- Universite Libre de Bruxelles.
  9. Christian Lessmann & Gunther Markwardt, 2010. "Decentralization and Foreign Aid Effectiveness: Do Aid Modality and Federal Design Matter in Poverty Alleviation?," CESifo Working Paper Series 3035, CESifo Group Munich.
  10. Michael A. Nelson, 2012. "Corruption and the Size of Local Governments: Are They Related?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1210, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  11. Lessmann, Christian & Markwardt, Gunther, 2009. "Aid, growth and decentralization," Dresden Discussion Paper Series in Economics 09/09, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  12. Wang, Zhiguo & Ma, Liang, 2012. "New Development of Fiscal Decentralization in China," MPRA Paper 36918, University Library of Munich, Germany.
  13. Lars P. Feld & Gebhard Kirchgässner & Christoph A. Schaltegger, 2004. "Fiscal Federalism and Economic Performance: Evidence from Swiss Cantons," Marburg Working Papers on Economics 200420, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  14. Jing Jin & Heng-fu Zou, 2000. "How does fiscal decentralization affect aggregate, national, and subnational government size?," CEMA Working Papers 72, China Economics and Management Academy, Central University of Finance and Economics.
  15. Jing Jin & Chunli Shen & Heng-fu Zou, 2011. "Fiscal Decentralization and Peasants' Financial Burden in China," CEMA Working Papers 490, China Economics and Management Academy, Central University of Finance and Economics.
  16. Goel, Rajeev K. & Nelson, Michael A., 2010. "Causes of corruption: History, geography and government," Journal of Policy Modeling, Elsevier, vol. 32(4), pages 433-447, July.

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