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Taxation incentives and deadweight loss in a system of intergovernmental transfers

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  • Michael Smart

Abstract

Intergovernmental transfer programs in many federal systems, including Canada, attempt to equalize differences in subnational jurisdictions' tax capacities on the basis of the so-called representative tax system (RTS). It is shown that RTS equalization grants effectively compensate local governments for a portion of the deadweight loss associated with taxes, and consequently the grants may tend to increase the distortionary tax rates chosen by local governments. This may be the case even when equalization is confined to tax bases which are themselves non-distortionary, such as the taxation of pure economic rents. These insights are then applied to a discussion of the design of an optimal revenue-sharing scheme for a federation, given the implementation constraints facing the central government.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-MSMART-96-03.ps
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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-MSMART-96-03.pdf
File Function: MainText
Download Restriction: no

Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number msmart-96-03.

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Length: 23 pages
Date of creation: 22 Jul 1996
Date of revision:
Handle: RePEc:tor:tecipa:msmart-96-03

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  1. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  2. Boadway, Robin, 1982. "On the Method of Taxation and the Provision of Local Public Goods: Comment," American Economic Review, American Economic Association, vol. 72(4), pages 846-51, September.
  3. MINTZ, Jack & TULKENS, Henry, . "Commodity tax competition between member states of a federation: equilibrium and efficiency," CORE Discussion Papers RP -693, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
  5. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-80, January.
  6. B. Dahlby & L. S. Wilson, 1994. "Fiscal Capacity, Tax Effort, and Optimal Equalization Grants," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 657-72, August.
  7. Flatters, Frank & Henderson, Vernon & Mieszkowski, Peter, 1974. "Public goods, efficiency, and regional fiscal equalization," Journal of Public Economics, Elsevier, vol. 3(2), pages 99-112, May.
  8. Thomas J. Courchene & David A. Beavis, 1973. "Federal-Provincial Tax Equalization: An Evaluation," Canadian Journal of Economics, Canadian Economics Association, vol. 6(4), pages 483-502, November.
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Cited by:
  1. Santiago Lago Peñas, 2002. "Nivelación interterritorial e ineficiencia de las decisiones presupuestarias: reflexiones para el caso español," Hacienda Pública Española, IEF, vol. 162(3), pages 79-100, ¨Septemb.
  2. Muhammad Sabir, 2001. "Dynamic Consequences of the 1997 NFC Award: Provincial Social Sector Expenditures," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 967-984.
  3. Thierry Madiès & Sonia Paty & Yvon Rocaboy, 2005. "Externalités fiscales horizontales et verticales. Où en est la théorie du fédéralisme financier ?," Revue d'économie politique, Dalloz, vol. 0(1), pages 17-63.
  4. Alejandro Esteller & Albert Solé, 2001. "Tax Setting in a Federal System: The Case of Personal Income Taxation in Canada," Working Papers 2001/9, Institut d'Economia de Barcelona (IEB).
  5. Sotiris Karkalakos & Christos Kotsogiannis, 2007. "A spatial analysis of provincial corporate income tax responses: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 782-811, August.
  6. Ann Cavlovic & Harriet Jackson, . "Bother thy neighbour? Intergovernmental Tax Interactions in the Canadian Federation," Working Papers-Department of Finance Canada 2003-09, Department of Finance Canada.
  7. S. Bucovetsky, 1997. "Insurance and Incentive Effects of Transfers among Regions: Equity and Efficiency," International Tax and Public Finance, Springer, vol. 4(4), pages 463-483, November.

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