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Federalism in an endogenous growth model with tax base sharing and heterogeneous education services

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  • Thierry Madiès
  • Bruno Ventelou

Abstract

We examine the effects of tax base sharing on the growth path of an economy in which central and regional governments provide heterogeneous educational services (general and specific training) which increase capital productivity. Our focus is the non co-operative game between two overlapping governments - central and regional - whose objective is to maximise their net tax revenues of educational spending (Leviathan hypothesis). We will show that the dispute between centralisation and decentralisation depends on two effects; the first is a "tax effect", which supports centralisation in that tax base sharing leads to overtax the common tax base, and so has a negative effect on the growth path. Second is a "public good effect", which defends decentralisation because the very diversity of central and regional educational services has a beneficial effect on the growth path (educational services are imperfect substitutes and "specific assets" of each level of government). We discuss the virtue of tax base sharing in a federation, as an "incentive scheme" within government's grasp. Copyright RSAI 2005.

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  • Thierry Madiès & Bruno Ventelou, 2005. "Federalism in an endogenous growth model with tax base sharing and heterogeneous education services," Papers in Regional Science, Wiley Blackwell, vol. 84(1), pages 1-19, March.
  • Handle: RePEc:bla:presci:v:84:y:2005:i:1:p:1-19
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    Cited by:

    1. Thushyanthan Baskaran & Lars P. Feld & Jan Schnellenbach, 2014. "Fiscal Federalism, Decentralization and Economic Growth: Survey and Meta-Analysis," CESifo Working Paper Series 4985, CESifo Group Munich.
    2. 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, pages 17-63.
    3. Pierre Salmon, 2013. "Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?," Constitutional Political Economy, Springer, pages 87-107.
    4. Thierry Madiès & Sonia Paty & Yvon Rocaboy, 2005. "Les stratégies fiscales des collectivités locales. De la théorie à la réalité," Revue de l'OFCE, Presses de Sciences-Po, pages 283-315.
    5. Bodman, Philip & Campbell, Harry & Le, Thanh, 2012. "Public investment, taxation, and long-run output in economies with multi-level governments," Economic Modelling, Elsevier, vol. 29(5), pages 1603-1611.
    6. Phil Bodman & Harry Campbell & Thanh Le, "undated". "Public Investment, Taxation, and Growth in Economies with Multi-leveled Governments," MRG Discussion Paper Series 4512, School of Economics, University of Queensland, Australia.

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