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On states’ behavior with equalization grants

  • Diego Martínez López

    ()

    (Centro de Estudios Andaluces)

This paper discusses how state government’s behaviour is affected when the so-called Representative Tax System (RTS) equalization scheme is implemented. In particular, we study the changes in the marginal cost of public funds (MCPF), and in the first order conditions for the optimal provision of public inputs. Following Smart (1998), those equalization transfers might create a price effect that induces the subnational governments to raise taxes. However, this result has to be qualified under certain assumptions. Also we find that there is an ambiguous relationship between the degree of fiscal equalization and the marginal cost of providing the public input and the level of taxation. In a sense, it is not clear that more redistribution necessarily leads to more inefficiency caused by higher taxes.

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Article provided by IEF in its journal Hacienda Pública Española/Revista de Economía Pública.

Volume (Year): 174 (2005)
Issue (Month): 3 (September)
Pages: 43-54

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Handle: RePEc:hpe:journl:y:2005:v:174:i:3:p:43-54
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  1. Robin Boadway and Michael Keen, . "Efficiency and the Optimal Direction of Federal-State Transfers," Economics Discussion Papers 445, University of Essex, Department of Economics.
  2. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," Munich Reprints in Economics 20129, University of Munich, Department of Economics.
  3. Christian Baretti & Bernd Huber & Karl Lichtblau, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," International Tax and Public Finance, Springer, vol. 9(6), pages 631-649, November.
  4. Charles L. Ballard & Don Fullerton, 1993. "Distortionary Taxes and the Provision of Public Goods," NBER Working Papers 3506, National Bureau of Economic Research, Inc.
  5. James P. Feehan, 2002. "Distortionary Taxation and Optimal Public Spending on Productive Activities," Economic Inquiry, Western Economic Association International, vol. 40(1), pages 60-68, January.
  6. Thiess Buettner, 2005. "The Incentive Effect of Fiscal Equalization Transfers on Tax Policy," CESifo Working Paper Series 1404, CESifo Group Munich.
  7. 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.
  8. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  9. Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, 01.
  10. Kotsogiannis, Christos & Makris, Miltiadis, 2002. "On production efficiency in federal systems," Economics Letters, Elsevier, vol. 76(2), pages 281-287, July.
  11. Schob, Ronnie, 1994. "On Marginal Cost and Marginal Benefit of Public Funds," Public Finance = Finances publiques, , vol. 49(1), pages 87-106.
  12. Blackorby, Charles & Brett, Craig, 2000. "Fiscal Federalism Revisited," Journal of Economic Theory, Elsevier, vol. 92(2), pages 300-317, June.
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