Public investment, taxation, and long-run output in economies with multi-level governments
This paper examines the dynamic effects of taxation and investment on the steady state output level of an economy. A simple neoclassical growth model with different tiers of government is developed. The initial focus is on governments that aim to maximise their citizens' welfare and economic performance by providing consumption goods for private consumption and public capital for private production. It is shown that a long-run per capita output maximising tax rate can be derived and that there also exists an optimal degree of fiscal decentralisation. The analysis then extends to the case where governments attempt instead to maximise their own tax revenue to fund expenditures which do not contribute to the utility of their citizens. Three different cases of taxation arrangement are considered: tax competition, tax sharing, and tax coordination. The modeling shows that intensifying tax competition will lead to an increase in the aggregate tax rate as compared to the cases of sharing and coordination amongst governments. These tax rates are both higher than the long-run per capita output maximising rate that was implied under the welfare maximising government scenario.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Heng-fu Zou, 1994.
"Taxes, Federal Grants, Local Public Spending, and Growth,"
CEMA Working Papers
78, China Economics and Management Academy, Central University of Finance and Economics.
- Zou, Heng-fu, 1996. "Taxes, Federal Grants, Local Public Spending, and Growth," Journal of Urban Economics, Elsevier, vol. 39(3), pages 303-317, May.
- Besley, Timothy & Smart, Michael, 2007.
"Fiscal restraints and voter welfare,"
Journal of Public Economics,
Elsevier, vol. 91(3-4), pages 755-773, April.
- Timothy Besley & Michael Smart, 2005. "Fiscal restraints and voter welfare," LSE Research Online Documents on Economics 3769, London School of Economics and Political Science, LSE Library.
- Timothy Besley & Michael Smart, 2005. "Fiscal Restraints and Voter Welfare," STICERD - Political Economy and Public Policy Paper Series 06, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Martinez-Vazquez, Jorge & McNab, Robert M., 2003.
"Fiscal Decentralization and Economic Growth,"
Elsevier, vol. 31(9), pages 1597-1616, September.
- Jorge Martinez-Vazquez & Robert McNab, 2001. "Fiscal Decentralization and Economic Growth," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0101, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
- Danyang Xie & Heng-fu Zou & Hamid Davoodi, 1999.
"Fiscal Decentralization and Economic Growth in the United States,"
CEMA Working Papers
109, China Economics and Management Academy, Central University of Finance and Economics.
- Xie, Danyang & Zou, Heng-fu & Davoodi, Hamid, 1999. "Fiscal Decentralization and Economic Growth in the United States," Journal of Urban Economics, Elsevier, vol. 45(2), pages 228-239, March.
- KEEN, Michael & MARCHAND, Maurice, 1996.
"Fiscal Competition and the Pattern of Public Spending,"
CORE Discussion Papers
1996001, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Keen, Michael & Marchand, Maurice, 1997. "Fiscal competition and the pattern of public spending," Journal of Public Economics, Elsevier, vol. 66(1), pages 33-53, October.
- Michael Keen, 1997.
"Vertical Tax Externalities in the Theory of Fiscal Federalism,"
IMF Working Papers
97/173, International Monetary Fund.
- Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 454-485, September.
- Boadway, R & Keen, M, 1996.
"Efficiency and the optimal direction of federal-state transfers,"
IFS Working Papers
W96/01, Institute for Fiscal Studies.
- Robin Boadway & Michael Keen, 1996. "Efficiency and the optimal direction of federal-state transfers," International Tax and Public Finance, Springer, vol. 3(2), pages 137-155, May.
- Robin Boadway and Michael Keen, . "Efficiency and the Optimal Direction of Federal-State Transfers," Economics Discussion Papers 445, University of Essex, Department of Economics.
- Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May.
- 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.
- Barro, R.J., 1988.
"Government Spending In A Simple Model Of Endogenous Growth,"
RCER Working Papers
130, University of Rochester - Center for Economic Research (RCER).
- Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
- Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
- Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- Koethenbuerger, Marko & Lockwood, Ben, 2007.
"Does Tax Competition Really Promote Growth?,"
The Warwick Economics Research Paper Series (TWERPS)
810, University of Warwick, Department of Economics.
- Hamid Davoodi & Heng-fu Zou, 1996.
"Fiscal Decentralization and Economic Growth: A Cross-Country Study,"
CEMA Working Papers
98, China Economics and Management Academy, Central University of Finance and Economics.
- Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
- Daniel Treisman, 2006. "Fiscal Decentralization, Governance, And Economic Performance: A Reconsideration," Economics and Politics, Wiley Blackwell, vol. 18(2), pages 219-235, 07.
- Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
- Michael Rauscher, 2005. "Economic Growth and Tax-Competing Leviathans," International Tax and Public Finance, Springer, vol. 12(4), pages 457-474, August.
- Motohiro Sato & Shinji Yamashige, 2005. "Decentralization and Economic Development: An Evolutionary Approach," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(3), pages 497-520, 08.
- Philip Bodman & Andrew Hodge, 2010. "What Drives Fiscal Decentralisation? Further Assessing the Role of Income," Fiscal Studies, Institute for Fiscal Studies, vol. 31(3), pages 373-404, 09.
- Wallace Oates, 2005. "Toward A Second-Generation Theory of Fiscal Federalism," International Tax and Public Finance, Springer, vol. 12(4), pages 349-373, August.
- Ronald Edwards, 2005. "The structure of authority, federalism, commitment and economic growth," Economic Theory, Springer, vol. 25(3), pages 629-648, 04.
- Nobuo Akai & Yukihiro Nishimura & Masayo Sakata, 2007. "Complementarity, fiscal decentralization and economic growth," Economics of Governance, Springer, vol. 8(4), pages 339-362, September.
- Thierry Madiès & B. Ventelou, 2005. "Federalism in an endogenous growth model with tax base sharing and heterogeneous education services," Post-Print halshs-00079596, HAL.
- Ulrich Thießen, 2003. "Fiscal Decentralisation and Economic Growth in High-Income OECD Countries," Fiscal Studies, Institute for Fiscal Studies, vol. 24(3), pages 237-274, September.
- Thornton, John, 2007. "Fiscal decentralization and economic growth reconsidered," Journal of Urban Economics, Elsevier, vol. 61(1), pages 64-70, January.
When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:1603-1611. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.