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Grants Versus Tax Sharing: the Extent of Central Government Control

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  • Graeme Roy

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    Abstract

    By spending more than they are able to raise, sub-central governments typically depend heavily upon central transfers to meet their expenditure responsibilities. While grants remain the most popular method of transfer, the possible use of tax sharing arrangements as an alternative method of finance has received increased attention in recent years. In nearly all tax sharing systems that we are aware of, central governments play a dominant role in determining the amount of revenue each sub-central unit receives from the shared source. It has therefore, become common in the academic literature to interpret grants and tax sharing as equivalent tools of central fiscal control over sub-central tiers. However, we caution against this. In our paper, we demonstrate that only in a particular special case is it correct to conclude that the level of central control of sub-central finances is the same under a system of grants as it is under tax sharing.

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    Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa06p74.

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    Date of creation: Aug 2006
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    Handle: RePEc:wiw:wiwrsa:ersa06p74

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    1. Rodden, Jonathan, 2003. "Reviving Leviathan: Fiscal Federalism and the Growth of Government," International Organization, Cambridge University Press, vol. 57(04), pages 695-729, September.
    2. Carl Emmerson & John Hall & Michael Ridge, 1998. "The impact of expenditure limitations on local government spending: evidence from the United Kingdom," IFS Working Papers W98/05, Institute for Fiscal Studies.
    3. Perotti, Roberto, 1998. " The Political Economy of Fiscal Consolidations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 367-94, March.
    4. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
    5. James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
    6. Isabelle Joumard & Wim Suyker, 2002. "Enhancing the Effectiveness of Public Spending in Norway," OECD Economics Department Working Papers 343, OECD Publishing.
    7. Julia Darby & V. Anton Muscatelli & Graeme Roy, . "Fiscal Federalism and Fiscal Consolidation: Evidence from an Event Study," Working Papers 2005_21, Business School - Economics, University of Glasgow, revised Jun 2005.
    8. Julia Darby & V. Anton Muscatelli & Graeme Roy, . "How do Sub-Central Government react to cuts in grants received from Central Governments Evidence from a Panel of 15 OECD Countries," Working Papers 2005_18, Business School - Economics, University of Glasgow, revised Jun 2005.
    9. Jon H. Fiva, 2005. "New Evidence on Fiscal Decentralization and the Size of Government," CESifo Working Paper Series 1615, CESifo Group Munich.
    10. de Mello, Luiz Jr, 2000. "Fiscal Decentralization and Intergovernmental Fiscal Relations: A Cross-Country Analysis," World Development, Elsevier, vol. 28(2), pages 365-380, February.
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