The main goal of this paper is to estimate to what extent the federal government of the United States insures member states against regional income shocks. We find that a one dollar reduction in a region's per capita personal income triggers a decrease in federal taxes of about 34 cents and an increase in federal transfers of about 6 cents. Hence, the final reduction in disposable per capita income is on the order of 60 cents. That is, between one third and one half of the initial shock is absorbed by the federal government. The much larger reaction of taxes than transfers to these regional imbalances reflects the fact that the main mechanism at work is the federal income tax system which in turn means that the stabilization process is automatic rather than specifically designed each time there is a cyclical movement in income. Some economists may want to argue that this regional insurance scheme provided by the federal government is an important reason why the system of fixed exchange rates that exists within the United States today has survived without major problems. Under this view, the creation of a European Central Bank that issues unified European currency without the simultaneous introduction (or expansion) of a fiscal federalist system could put the project at risk. Rough calculations of the impact of the existing European tax system on regional income suggests that a one dollar shock to regional GDP will reduce tax payments to the EEC government by half a cent!. Hence, the current European tax system has a long way to go before it reaches the 34 cents of the U.S. Federal Government.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
3855.
Length: Date of creation: Oct 1991 Date of revision: Handle: RePEc:nbr:nberwo:3855
Note: ITI IFM Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: ().
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.