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Fiscal Externalities and Efficient Transfers in a Federation

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  • Motohiro Sato

Abstract

This paper investigates properties of the second best allocation in a fiscal federal system in which both federal tax and intergovernmental grants are involved and the taxation is distortionary. Also, optimal federal grants and tax policies in a decentralized fiscal system are examined. Our major findings are: (i) the second best does not require the equalization of marginal cost of public funds across regions in a conventional form; (ii) matching grants based on either the local tax rates or tax revenues should be introduced to internalize the tax externality; and (iii) once lump-sum and matching grants are optimized, federal tax policy becomes redundant so the optimal fiscal gap is indeterminate. Copyright Kluwer Academic Publishers 2000

Suggested Citation

  • Motohiro Sato, 2000. "Fiscal Externalities and Efficient Transfers in a Federation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(2), pages 119-139, March.
  • Handle: RePEc:kap:itaxpf:v:7:y:2000:i:2:p:119-139
    DOI: 10.1023/A:1008709203069
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    References listed on IDEAS

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    1. repec:kap:itaxpf:v:24:y:2017:i:5:d:10.1007_s10797-016-9435-y is not listed on IDEAS
    2. Diego Martínez López, 2004. "Vertical externalities in the provision of public inputs," Economic Working Papers at Centro de Estudios Andaluces E2004/47, Centro de Estudios Andaluces.
    3. Diego Martinez-Lopez & Tomas Sjöngren, 2014. "Vertical externalities with lump-sum taxes: how much difference does unemployment make?," European Journal of Government and Economics, Europa Grande, vol. 3(1), pages 75-87, June.
    4. repec:kap:itaxpf:v:24:y:2017:i:2:d:10.1007_s10797-016-9415-2 is not listed on IDEAS
    5. Lisa Grazzini & Alessandro Petretto, 2006. "Vertical Tax Competition with Tax Sharing and Equalization Grants," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(1), pages 75-94, May.
    6. Jorge Martinez-Vazquez & Cristian Sepulveda, 2012. "Toward a More General Theory of Revenue Assignments," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1231, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    7. Boadway, Robin & Tremblay, Jean-François, 2010. "Mobility and Fiscal Imbalance," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(4), pages 1023-1053, December.
    8. Thomas Aronsson & Sören Blomquist & Luca Micheletto, 2010. "Where Should the Elderly Live and Who Should Pay for Their Care?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(2), pages 289-314, June.
    9. Lisa Grazzini & Alessandro Petretto, 2012. "Voting on devolution in a federal country with a bicameral national system," Economics of Governance, Springer, vol. 13(1), pages 51-72, March.
    10. Aronsson, Thomas, 2010. "Optimal income taxation and decentralized fiscal federalism," Regional Science and Urban Economics, Elsevier, vol. 40(4), pages 187-195, July.
    11. Gordon, Roger H. & Cullen, Julie Berry, 2012. "Income redistribution in a Federal system of governments," Journal of Public Economics, Elsevier, vol. 96(11), pages 1100-1109.
    12. Koethenbuerger, Marko, 2008. "Federal tax-transfer policy and intergovernmental pre-commitment," Regional Science and Urban Economics, Elsevier, vol. 38(1), pages 16-31, January.
    13. Aronsson, Thomas & Blomquist, Sören & Micheletto, Luca, 2007. "Where Should the Elderly Live and Who Should Pay for their Care? A Study in Demographics and Geographical Economics," Working Paper Series 2007:6, Uppsala University, Department of Economics.
    14. Diego Martínez, 2014. "Vertical externalities revisited: new results with public inputs and unit taxation," Working Papers. Collection A: Public economics, governance and decentralization 1403, Universidade de Vigo, GEN - Governance and Economics research Network.
    15. Alejandro Esteller-Moré & Umberto Galmarini & Leonzio Rizzo, 2015. "Fiscal equalization under political pressures," Working Papers 2015/21, Institut d'Economia de Barcelona (IEB).

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