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Federalism, Taxation, and Economic Growth

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  • Hatfield, John

    (Stanford U)

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    Abstract

    We show that federalism will lead to higher economic growth. We present a model of endogenous growth where government services, funded by income and capital taxes, are a component of production. In this model a decentralized government will choose tax policy to maximize economic growth, while a centralized government will not do so. Furthermore, these conclusions hold regardless of whether the government is beholden to a median voter or is a rent-maximizing Leviathan. However, a decentralized government will under- provide a consumptive public good. Finally, we show our results are robust to imperfect capital mobility between districts and in such a model that districts with a lower total factor productivity will choose a more growth-enhancing tax policy.

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    Bibliographic Info

    Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1929.

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    Date of creation: Jan 2006
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    Handle: RePEc:ecl:stabus:1929

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    1. Fisman, Raymond & Gatti, Roberta, 2002. "Decentralization and corruption: evidence across countries," Journal of Public Economics, Elsevier, vol. 83(3), pages 325-345, March.
    2. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
    3. Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
    4. Obstfeld, Maurice, 1998. "The Global Capital Market: Benefactor or Menace?," Center for International and Development Economics Research, Working Paper Series qt3kn3n2s8, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    5. KEEN, Michael & MARCHAND, Maurice, 1996. "Fiscal Competition and the Pattern of Public Spending," CORE Discussion Papers 1996001, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922, Fall.
    7. Lockwood, Ben, 1998. "Distributive Politics and the Costs of Centralization," CEPR Discussion Papers 2046, C.E.P.R. Discussion Papers.
    8. Fisman, Raymond & Gatti, Roberta, 2002. " Decentralization and Corruption: Evidence from U.S. Federal Transfer Programs," Public Choice, Springer, vol. 113(1-2), pages 25-35, October.
    9. John Duggan & Mark Fey, 2006. "Repeated Downsian electoral competition," International Journal of Game Theory, Springer, vol. 35(1), pages 39-69, December.
    10. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
    11. Willmann, Gerald, 2003. "Why Legislators are Protectionists: the Role of Majoritarian Voting in Setting Tariffs," Economics Working Papers 2003,10, Christian-Albrechts-University of Kiel, Department of Economics.
    12. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
    13. Besley, Timothy & Coate, Stephen, 2003. "Centralized versus decentralized provision of local public goods: a political economy approach," Journal of Public Economics, Elsevier, vol. 87(12), pages 2611-2637, December.
    14. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
    15. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    16. Rubinchik-Pessach, Anna, 2005. "Can decentralization be beneficial?," Journal of Public Economics, Elsevier, vol. 89(7), pages 1231-1249, July.
    17. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
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    Cited by:
    1. Kai A. Konrad & Dan Kovenoch, 2009. "Competition for FDI with vintage investment and agglomeration advantages," Working Papers 2009/18, Institut d'Economia de Barcelona (IEB).
    2. John William Hatfield & Gerard Padró i Miquel, 2008. "A Political Economy Theory of Partial Decentralization," NBER Working Papers 14628, National Bureau of Economic Research, Inc.
    3. Pierre Salmon, 2013. "Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?," Constitutional Political Economy, Springer, vol. 24(2), pages 87-107, June.

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