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How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization

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  • Koethenbuerger, Marko

Abstract

Previous literature widely assumes that taxes are optimized in local public finance while expenditures adjust residually. This paper endogenizes the choice of the optimization variable. In particular, it analyzes how federal policy toward local governments' influences the way local governments decide on public policy. Unlike the usual presumption, the paper shows that local governments may choose to optimize over expenditures. The result holds when federal policy subsidizes local taxation. The results offer a new perspective of the efficiency implications of federal policy toward local governments and, thereby, enable a more precise characterization of local government behavior in fiscal federalism.

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  • Koethenbuerger, Marko, 2011. "How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization," Journal of Public Economics, Elsevier, vol. 95(11), pages 1516-1522.
  • Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1516-1522 DOI: 10.1016/j.jpubeco.2011.06.006
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    Cited by:

    1. Brülhart, Marius & Parchet, Raphaël, 2014. "Alleged tax competition: The mysterious death of bequest taxes in Switzerland," Journal of Public Economics, Elsevier, pages 63-78.
    2. Yutao Han, 2013. "Who benefits from partial tax coordination?," CREA Discussion Paper Series 13-24, Center for Research in Economic Analysis, University of Luxembourg.
    3. Koethenbuerger, Marko, 2014. "Competition for migrants in a federation: Tax or transfer competition?," Journal of Urban Economics, Elsevier, pages 110-118.
    4. Raphael Parchet, 2014. "Are Local Tax Rates Strategic Complements or Strategic Substitutes?," IdEP Economic Papers 1407, USI Università della Svizzera italiana.
    5. Hansjörg Blöchliger & José Maria Pinero Campos, 2011. "Tax Competition Between Sub-Central Governments," OECD Working Papers on Fiscal Federalism 13, OECD Publishing.
    6. Mariana Lopes da Fonseca, 2017. "Tax Mimicking in Local Business Taxation: Quasi-experimental Evidence from Portugal," CESifo Working Paper Series 6647, CESifo Group Munich.
    7. Neelanjan Sen & Rajit Biswas, 2017. "Indirect Taxes in Oligopoly in Presence of Licensing Opportunities," Journal of Industry, Competition and Trade, Springer, vol. 17(1), pages 61-82, March.
    8. Koethenbuerger, Marko, 2011. "How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization," Journal of Public Economics, Elsevier, pages 1516-1522.
    9. Raphael Parchet, 2012. "Are Local Tax Rates Strategic Complements or Substitutes?," ERSA conference papers ersa12p313, European Regional Science Association.
    10. Andreas Wagener, 2016. "Evolutionary Stability in Fiscal Competition," CESifo Working Paper Series 5791, CESifo Group Munich.
    11. Nithin K, 2015. "The Case of Revenue versus Expenditure Optimization in India," Working Papers 1528, Indian Institute of Foreign Trade.
    12. Sebastian G. Kessing & Benny Schneider, 2014. "Regional Investment and Individual Redistribution in a Federation," Volkswirtschaftliche Diskussionsbeiträge 168-14, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    13. Brülhart, Marius & Parchet, Raphaël, 2014. "Alleged tax competition: The mysterious death of bequest taxes in Switzerland," Journal of Public Economics, Elsevier, pages 63-78.
    14. Hansjörg Blöchliger & José Maria Pinero Campos, 2011. "Tax Competition Between Sub-Central Governments," OECD Working Papers on Fiscal Federalism 13, OECD Publishing.

    More about this item

    Keywords

    Tax vs. expenditure optimization; Federalism; Endogenous commitment; Fiscal incentives; Policy interaction;

    JEL classification:

    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H1 - Public Economics - - Structure and Scope of Government

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