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A Computable General Equilibrium Model of Intergovernmental Aid

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  • Thomas J. Nechyba

Abstract

This paper introduces a computable general equilibrium model of intergovernmental relations in which heterogeneous agents (i) are endowed with income and houses, (ii) are fully mobile between multiple jurisdictions, and (iii) vote in both local and state elections to determine local property and state income tax rates. The model is calibrated to New Jersey micro tax data and used to study the general equilibrium effects of state government policies. Three different types of intergovernmental programs are analyzed: (i) redistributive revenue sharing, (ii) district power equalization and (iii) deductibility of local taxes. The approach facilitates a heretofore difficult comparative analysis in that it provides for an integrated investigation of these programs in a single general equilibrium model.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5420.

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Date of creation: Jan 1996
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Publication status: published as Journal of Public Economics, 62, 363-397, 1996.
Handle: RePEc:nbr:nberwo:5420

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  1. Rothstein, Paul, 1992. "The demand for education with 'power equalizing' aid : Estimation and simulation," Journal of Public Economics, Elsevier, vol. 49(2), pages 135-162, November.
  2. Martin Feldstein & Gilbert Metcalf, 1986. "The Effect of Federal Tax Deductibility on State and Local Taxes and Spending," NBER Working Papers 1791, National Bureau of Economic Research, Inc.
  3. Holtz-Eakin, Douglas & Rosen, Harvey, 1990. "Federal deductibility and local property tax rates," Journal of Urban Economics, Elsevier, vol. 27(3), pages 269-284, May.
  4. Westhoff, Frank, 1977. "Existence of equilibria in economies with a local public good," Journal of Economic Theory, Elsevier, vol. 14(1), pages 84-112, February.
  5. Bucovetsky, Sam, 1982. "Inequality in the Local Public Sector," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 128-45, February.
  6. Inman, Robert P. & Wolf, Douglas, 1976. "Sofa: A simulation program for predicting and evaluating the policy effects of grants-in-aid," Socio-Economic Planning Sciences, Elsevier, vol. 10(2), pages 77-88.
  7. 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.
  8. Epple, Dennis & Filimon, Radu & Romer, Thomas, 1993. "Existence of voting and housing equilibrium in a system of communities with property taxes," Regional Science and Urban Economics, Elsevier, vol. 23(5), pages 585-610, November.
  9. Cassidy, Glenn & Epple, Dennis & Romer, Thomas, 1989. "Redistribution by local governments in a monocentric urban area," Regional Science and Urban Economics, Elsevier, vol. 19(3), pages 421-454, August.
  10. Howard Chemick & Andrew Reschovsky, 1986. "Federal tax reform and the financing of state and local governments," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 5(4), pages 683-706.
  11. Reschovsky, Andrew, 1994. "Fiscal Equalization and School Finance," National Tax Journal, National Tax Association, vol. 47(1), pages 185-97, March.
  12. Brueckner, Jan K., 1983. "Central-city income redistribution and the flight to the suburbs : A stylized model," Regional Science and Urban Economics, Elsevier, vol. 13(2), pages 177-193, May.
  13. Luger, Michael I., 1988. "Federal tax reform and the interjurisdictional mobility impulse," Journal of Urban Economics, Elsevier, vol. 23(2), pages 235-250, March.
  14. Inman, Robert P., 1977. "Micro-fiscal planning in the regional economy : A general equilibrium approach," Journal of Public Economics, Elsevier, vol. 7(2), pages 237-260, April.
  15. Douglas Holtz-Eakin & Harvey S . Rosen, 1988. "Tax Deductibility and Municipal Budget Structure," NBER Chapters, in: Fiscal Federalism: Quantitative Studies, pages 107-136 National Bureau of Economic Research, Inc.
  16. Bradford, David F & Oates, Wallace E, 1971. "Towards a Predictive Theory of Intergovernmental Grants," American Economic Review, American Economic Association, vol. 61(2), pages 440-48, May.
  17. Zodrow, George, 1984. "The incidence of metropolitan property tax base sharing and rate equalization," Journal of Urban Economics, Elsevier, vol. 15(2), pages 210-229, March.
  18. Inman, Robert P., 1989. "The local decision to tax : Evidence from large U.S. Cities," Regional Science and Urban Economics, Elsevier, vol. 19(3), pages 455-491, August.
  19. Ladd, Helen F. & Yinger, John, 1994. "The Case for Equalizing Aid," National Tax Journal, National Tax Association, vol. 47(1), pages 211-24, March.
  20. Wildasin, David E., 1983. "The welfare effects of intergovernmental grants in an economy with independent jurisdictions," Journal of Urban Economics, Elsevier, vol. 13(2), pages 147-164, March.
  21. Oakland, William H., 1994. "Fiscal Equalization: An Empty Box?," National Tax Journal, National Tax Association, vol. 47(1), pages 199-209, March.
  22. Feldstein, Martin S, 1975. "Wealth Neutrality and Local Choice in Public Education," American Economic Review, American Economic Association, vol. 65(1), pages 75-89, March.
  23. Singh, Nirvikar & Thomas, Ravi, 1989. "Matching Grant Versus Block Grants with Imperfect Information," National Tax Journal, National Tax Association, vol. 42(2), pages 191-203, June.
  24. Fischel, William A., 1976. "An evaluation of proposals for metropolitan sharing of commercial and industrial property tax base," Journal of Urban Economics, Elsevier, vol. 3(3), pages 253-263, July.
  25. Romer, Thomas & Rosenthal, Howard & Munley, Vincent G., 1992. "Economic incentives and political institutions: Spending and voting in school budget referenda," Journal of Public Economics, Elsevier, vol. 49(1), pages 1-33, October.
  26. de Bartolome, Charles A. M., 1991. "Redistributive state aid to local communities," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 511-528, November.
  27. Thomas J. Nechyba, 1996. "Public School Finance in a General Equilibrium Tiebout World: Equalization Programs, Peer Effects and Private School Vouchers," NBER Working Papers 5642, National Bureau of Economic Research, Inc.
  28. Epple, Dennis & Romer, Thomas, 1991. "Mobility and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 828-58, August.
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Citations

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Cited by:
  1. Thomas Nechyba, 1996. "Fiscal federalism and local public finance: A computable general equilibrium (CGE) framework," International Tax and Public Finance, Springer, vol. 3(2), pages 215-231, May.
  2. Nechyba, Thomas J., 2002. "Centralization, Fiscal Federalism and Privte School Attendance," Working Papers 02-11, Duke University, Department of Economics.
  3. Thomas J. Nechyba, 1996. "Public School Finance in a General Equilibrium Tiebout World: Equalization Programs, Peer Effects and Private School Vouchers," NBER Working Papers 5642, National Bureau of Economic Research, Inc.
  4. Raquel Fernandez & Richard Rogerson, 2003. "Equity and Resources: An Analysis of Education Finance Systems," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 858-897, August.
  5. Fernández, Raquel, 2001. "Sorting, Education and Inequality," CEPR Discussion Papers 3020, C.E.P.R. Discussion Papers.
  6. Thomas J. Nechyba, 2006. "Alternative education finance strategies," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Mar, pages 7-27.
  7. Caroline M. Hoxby, 1998. "All School Finance Equalizations Are Not Created Equal," NBER Working Papers 6792, National Bureau of Economic Research, Inc.
  8. Deltas, George & Van Der Beek, Gregor, 2003. "Modeling fiscal federalism: a decomposition analysis of changes in intra-European Union budgetary transfers," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(4), pages 592-613.
  9. de Bartolome, Charles A. M. & Ross, Stephen L., 2003. "Equilibria with local governments and commuting: income sorting vs income mixing," Journal of Urban Economics, Elsevier, vol. 54(1), pages 1-20, July.
  10. Raquel Fernandez, 2001. "Sorting, Education and Inequality," NBER Working Papers 8101, National Bureau of Economic Research, Inc.
  11. Thomas J. Nechyba, 2000. "Mobility, Targeting, and Private-School Vouchers," American Economic Review, American Economic Association, vol. 90(1), pages 130-146, March.
  12. Nechyba, Thomas J. & Strauss, Robert P., 1998. "Community choice and local public services: A discrete choice approach," Regional Science and Urban Economics, Elsevier, vol. 28(1), pages 51-73, January.

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