Efficiency and the Fiscal Gap in Federal Systems
AbstractThis paper investigates the efficiency argument for a vertical fiscal gap in a federation using a simple model of a central government and several identical states. Each level provides a public good to residents within its jurisdiction and finances it by taxing labour income and rents. If labour supply is fixed, there need not be a fiscal gap even if households are perfectly mobile. With variable labour supply, however, decentralized decision-making by the states will generally be inefficient because states' tax policies will affect not only their own revenues but also those of the federal government. If the federal government chooses its budgetary policy first and the states take this policy as given, federal policies can be chosen to replicate the second-best optimum. Moreover, with or without mobile households, second-best optimal federal policy involves negative federal labour tax rates and can plausibly also require a negative fiscal gap, with transfers going from the states to the federal government. Thus, on efficiency grounds, there can be no presumption that inter-governmental transfers should go from higher levels of government to lower.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. 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.
Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 915.
Length: 27 pages
Date of creation: Nov 1994
Date of revision:
Fiscal Gap; Fiscal Federalism;
Find related papers by JEL classification:
- H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
- Robin Boadway and Michael Keen, .
"Efficiency and the Optimal Direction of Federal-State Transfers,"
Economics Discussion Papers
445, University of Essex, Department of Economics.
- Robin Boadway & Michael Keen, 1996. "Efficiency and the optimal direction of federal-state transfers," International Tax and Public Finance, Springer, vol. 3(2), pages 137-155, May.
- Boadway, R & Keen, M, 1996. "Efficiency and the optimal direction of federal-state transfers," IFS Working Papers W96/01, Institute for Fiscal Studies.
- Besley, Timothy J. & Rosen, Harvey S., 1998.
"Vertical externalities in tax setting: evidence from gasoline and cigarettes,"
Journal of Public Economics,
Elsevier, vol. 70(3), pages 383-398, December.
- Timothy J. Besley & Harvey S. Rosen, 1999. "Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes," NBER Working Papers 6517, National Bureau of Economic Research, Inc.
- Tim Besley & Harvey S. Rosen, 1997. "Vertical externalities in tax settings: evidence from gasoline and cigarettes," IFS Working Papers W97/23, Institute for Fiscal Studies.
- Seija Parviainen, 1998. "Redistribution and Risk Sharing in EMU," Discussion Papers 159, Government Institute for Economic Research Finland (VATT).
- Madiès, Thierry, 2001. "Fiscalité superposée et externalités fiscales verticales : faut-il reconsidérer le débat entre concurrence et coopération fiscales?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 77(4), pages 593-612, dÃ©cembre.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock).
If references are entirely missing, you can add them using this form.