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Public investment and budget rules for state vs. local governments

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  • Marco Bassetto

Abstract

Across different layers of the U.S. government there are surprisingly large differences in institutional provisions that impose fiscal discipline, such as constitutionally mandated deficit or debt limits, or specific tax bases. In this paper we develop a framework that can be used to quantitatively assess their costs and benefits. The model features both endogenous and exogenous mobility across jurisdictions, so we can evaluate whether the different degree of mobility at the local vs. national level can justify different institutional restrictions. In preliminary results, we show that pure land taxes have very beneficial incentive effects, but can only raise limited amounts of revenues. In contrast, under exogenous mobility, income taxes lead unambiguously to insufficient incentives to invest in public capital, unless the fiscal constraints explicitly favor such investment. This conclusion seems to hold even with the introduction of endogenous mobility, since adverse congestion effects from inefficient migration offset the beneficial impact of (partial) capitalization of future taxes into land prices.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-08-21.

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Date of creation: 2008
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Handle: RePEc:fip:fedhwp:wp-08-21

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Keywords: State finance ; Local finance ; Investments;

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References

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  1. John Conley & Antonio Rangel, 2001. "Intergenerational Fiscal Constitutions: How to Protect Future Generations Using Land Taxes and Federalism," Economics Bulletin, AccessEcon, vol. 28(17), pages A0.
  2. Harald Uhlig, 1996. "A law of large numbers for large economies (*)," Economic Theory, Springer, vol. 8(1), pages 41-50.
  3. Matthias Doepke & Fabrizio Zilibotti, 2005. "The Macroeconomics of Child Labor Regulation," American Economic Review, American Economic Association, vol. 95(5), pages 1492-1524, December.
  4. Mieszkowski, Peter & Zodrow, George R, 1989. "Taxation and the Tiebout Model: The Differential Effects of Head Taxes, Taxes on Land Rents, and Property Taxes," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1098-1146, September.
  5. Jovanovic, Boyan & Rosenthal, Robert W., 1986. "Anonymous Sequential Games," Working Papers 86-12, C.V. Starr Center for Applied Economics, New York University.
  6. Marco Bassetto, 2002. "Equilibrium and government commitment," Working Papers 624, Federal Reserve Bank of Minneapolis.
  7. Hassler, John & Krusell, Per & Storesletten, Kjetil & Zilibotti, Fabrizio, 2005. "The dynamics of government," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1331-1358, October.
  8. Marco Bassetto & Thomas J. Sargent, 2005. "Politics and efficiency of separating capital and ordinary Government budgets," Working Paper Series WP-05-07, Federal Reserve Bank of Chicago.
  9. Paul Klein & Per Krusell & José-V�ctor R�os-Rull, 2008. "Time-Consistent Public Policy," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 789-808.
  10. Jonah B. Gelbach, 2004. "Migration, the Life Cycle, and State Benefits: How Low Is the Bottom?," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 1091-1130, October.
  11. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  12. Schultz, C. & Sjostrom, T., 2000. "Local Public Goods, Debt and Migration," Papers 6-00-1, Pennsylvania State - Department of Economics.
  13. Marina, Azzimonti & Marco, Battaglini & Stephen, Coate, 2010. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," MPRA Paper 25935, University Library of Munich, Germany.
  14. Wildasin, David E. & Wilson, John Douglas, 1996. "Imperfect mobility and local government behaviour in an overlapping-generations model," Journal of Public Economics, Elsevier, vol. 60(2), pages 177-198, May.
  15. Marina Azzimonti Renzo, 2004. "On the dynamic inefficiency of governments," 2004 Meeting Papers 228, Society for Economic Dynamics.
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Cited by:
  1. Marco Bassetto & Leslie McGranahan, 2011. "On the Relationship Between Mobility, Population Growth, and Capital Spending in the United States," NBER Working Papers 16970, National Bureau of Economic Research, Inc.
  2. Marco Bassetto, 2009. "The Research Agenda: Marco Bassetto on the Quantitative Evaluation of Fiscal Policy Rules," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 10(2), April.

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