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The Theory of Fiscal Federalism: What Does it Mean for Europe?

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  • Torsten Persson
  • Gerard Roland
  • Guido Tabellini

Abstract

At the core of the ongoing political and academic debate on European integration lies a fundamental question: what is the appropriate assignment of policy tasks to different levels of government? This paper asks what economic theory has to say about this normative problem. Our starting point is traditional economic theory, which approaches the question of policy assignment from the perspective of social welfare maximization by a Pigovian benevolent planner. Then, we discuss the political economics approach to this same question. Two themes run through the paper. The first theme is that, when allowing for political economy considerations, straightforward normative conclusions on the appropriate degree of centralization are much more difficult to draw. The second theme relates to the existence of complementarities between policy dimensions. Complementarities imply that, in the absence of clear constitutional safeguards, the process of European integration is unstable and fragile. We conclude with a discussion of how to combine flexibility and commitment in the process of European integration.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 101.

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Handle: RePEc:igi:igierp:101

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  1. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," European Economic Review, Elsevier, Elsevier, vol. 34(2-3), pages 489-504, May.
  2. Maurice Obstfeld, 1989. "Dynamic Seigniorage Theory: An Exploration," NBER Working Papers 2869, National Bureau of Economic Research, Inc.
  3. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(5), pages 979-1009, October.
  4. Bolton, Patrick & Roland, Gerard, 1996. "Distributional Conflicts, Factor Mobility, and Political Integration," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 99-104, May.
  5. Bolton, Patrick & Roland, Gérard, 1995. "The Break up of Nations: A Political Economy Analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1225, C.E.P.R. Discussion Papers.
  6. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 55-93.
  7. Roger H. Gordon, 1982. "An Optimal Taxation Approach to Fiscal Federalism," NBER Working Papers 1004, National Bureau of Economic Research, Inc.
  8. Buchanan, James M & Faith, Roger L, 1987. "Secession and the Limits of Taxation: Toward a Theory of Internal Exit," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 1023-31, December.
  9. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 45(1), pages 13-76, December.
  10. Qian, Yingyi & Roland, Gérard, 1994. "Regional Decentralization and the Soft Budget Constraint: The Case of China," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1013, C.E.P.R. Discussion Papers.
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Cited by:
  1. SALMON, Pierre, 2002. "Accounting for centralisation in the European Union : Niskanen, Monnet or Thatcher?," LATEC - Document de travail - Economie (1991-2003), LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS UMR 5118, Université de Bourgogne 2002-05, LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS UMR 5118, Université de Bourgogne.
  2. George Gelauff & Sjef Ederveen & J.L.M. Pelkmans, 2006. "Assessing subsidiarity," CPB Document, CPB Netherlands Bureau for Economic Policy Analysis 133, CPB Netherlands Bureau for Economic Policy Analysis.
  3. SALMON, Pierre, 2003. "Assigning powers in the European Union in the light of yardstick competition among governments," LEG - Document de travail - Economie, LEG, Laboratoire d'Economie et de Gestion, CNRS, Université de Bourgogne 2003-03, LEG, Laboratoire d'Economie et de Gestion, CNRS, Université de Bourgogne.

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