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Fiscal Equalisation and the Soft Budget Constraint

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  • Plachta, Robert C.
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    Abstract

    This paper assesses the interactions of horizontal fiscal equalisation schemes with debt policy by sovereign regional governments. Local public goods are either financed by debt or taxation. A horizontal equalisation scheme eleviates regional public revenue disparities under horizontal and vertical tax competition. We show that fiscal equalisation schemes have no impact on the optimal central government grant whereas they can either soften or harden the regional budget constraint depending on the specific formulae. Revenue equalisation softens the budget constraint whereas tax base equalisation hardens the budget constraint of poor states. --

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    Bibliographic Info

    Paper provided by University of Cologne, FiFo Institute for Public Economics in its series FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge with number 08-8.

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    Date of creation: 2008
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    Handle: RePEc:zbw:uoccpe:7451

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    Keywords: Fiscal federalism; public debt; soft budget constraint; fiscal equalisation; tax competition;

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    1. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, vol. 9(4), pages 409-421, August.
    2. Marko Köthenbürger, 2002. "Tax Competition and Fiscal Equalization," International Tax and Public Finance, Springer, vol. 9(4), pages 391-408, August.
    3. Sam Bucovetsky & Michael Smart, 2002. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," CESifo Working Paper Series 767, CESifo Group Munich.
    4. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
    5. Huber, Bernd & Runkel, Marco, 2008. "Interregional redistribution and budget institutions under asymmetric information," Munich Reprints in Economics 19390, University of Munich, Department of Economics.
    6. Stähler, Nikolai, 2007. "Taxing deficits to restrain government spending and foster capital accumulation," Discussion Paper Series 1: Economic Studies 2007,26, Deutsche Bundesbank, Research Centre.
    7. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
    8. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    9. Marie-Laure Breuillé & Thierry Madiès & Emmanuelle Taugourdeau, 2007. "Funding source and soft budget constraint," EconomiX Working Papers 2007-12, University of Paris West - Nanterre la Défense, EconomiX.
    10. Rodden, Jonathan, 2003. "Reviving Leviathan: Fiscal Federalism and the Growth of Government," International Organization, Cambridge University Press, vol. 57(04), pages 695-729, September.
    11. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
    12. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
    13. Breuille, Marie-Laure & Madies, Thierry & Taugourdeau, Emmanuelle, 2006. "Does tax competition soften regional budget constraint?," Economics Letters, Elsevier, vol. 90(2), pages 230-236, February.
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