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The Optimal Taxation Approach to Intergovernmental Grants

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Author Info
Dahlby, Bev () (University of Alberta, Department of Economics)

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Abstract

An optimal tax system equates the marginal cost of public funds across all tax bases. This idea is applied to a federation to derive the optimal unconditional transfers that will promote an optimal allocation of taxation and expenditures among the governments in the federation. This approach provides insights into the concepts of vertical and horizontal fiscal imbalance, fiscal capacity, and fiscal need. Expressions for the optimal fiscal equalization grant and the optimal vertical fiscal gap are derived. We also show how the marginal cost of public funds affects the optimal matching grant rate for activities that generate expenditure externalities.

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File URL: http://www.uofaweb.ualberta.ca/economics2/pdfs/WP2009-16-Dahlby.pdf
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Publisher Info
Paper provided by University of Alberta, Department of Economics in its series Working Papers with number 2009-16.

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Length: 42 pages
Date of creation: 10 Mar 2009
Date of revision:
Handle: RePEc:ris:albaec:2009_016

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Related research
Keywords: intergovernmental grants; median voter model; fiscal federalism; vertical fiscal gap; vertical fiscal imbalance; fiscal capacity; fiscal need;

Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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This page was last updated on 2009-11-26.

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