Taxation incentives and deadweight loss in a system of intergovernmental transfers
AbstractIntergovernmental 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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Bibliographic InfoPaper provided by University of Toronto, Department of Economics in its series Working Papers with number msmart-96-03.
Length: 23 pages
Date of creation: 22 Jul 1996
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Find related papers by JEL classification:
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H7 - Public Economics - - State and Local Government; Intergovernmental Relations
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