Tax Decentralisation and local Government size
AbstractThe aim of this paper is to re-examine the relationship between fiscal federalism and the size of local governments. Traditionally, the empirical studies have focused on the different accountability power of grants and local taxes, concluding that the former encourages the growth and the latter contributes to contain local public spending. Yet, the existing literature is more silent about the possibility that different types of tax autonomy may still have differential impacts on the expansion of the local public sector. The paper addresses this issue by introducing a new testable hypothesis - the “Tax Separation Hypothesis” (TSH) - according to which tax decentralisation organised on tax bases used only by local governments would favour most the containment of local public expenditures, while that organised on tax base sharing (i.e. piggybacking mechanisms) is not expected to have a significant impact on the local government size. Using an unbalanced panel data set of OECD countries, we adopt the novel approach of disentangling the impact of local taxes - on income, property, and goods and services - on the size of the local public sector. In particular, property taxes only - mostly based on a “tax separation” scheme - seem to have a negative impact on the size of local government. Instead, both income taxes and general taxes on goods and services – often shared with central governments – have uncertain impacts on the size of local governments (and more frequently positive). We conclude that tax decentralisation is a necessary condition to contain local public expenditures, yet it is not sufficient, as a tax separation scheme would in fact be required.
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Bibliographic InfoPaper provided by Department of Economics - University Roma Tre in its series Departmental Working Papers of Economics - University 'Roma Tre' with number 0123.
Date of creation: Jun 2010
Date of revision:
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Fiscal decentralisation; Tax sharing; Tax separation; Property taxes; Local government size.;
Other versions of this item:
- H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-11-27 (Accounting & Auditing)
- NEP-ALL-2010-11-27 (All new papers)
- NEP-PBE-2010-11-27 (Public Economics)
- NEP-PUB-2010-11-27 (Public Finance)
- NEP-URE-2010-11-27 (Urban & Real Estate Economics)
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.:
- Luiz De Mello, 2001.
"Fiscal federalism and government size in transition economies: the case of Moldova,"
Journal of International Development,
John Wiley & Sons, Ltd., vol. 13(2), pages 255-268.
- International Monetary Fund, 1999. "Fiscal Federalism and Government Size in Transition Economies - The Case of Moldova," IMF Working Papers 99/176, International Monetary Fund.
- David Cantarero & Patricio Perez, 2012. "Decentralization and regional government size in Spain," Portuguese Economic Journal, Springer, vol. 11(3), pages 211-237, December.
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