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Tax decentralization and local government size

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  • Paolo Liberati
  • Agnese Sacchi

Abstract

This paper investigates the relationship between fiscal federalism and the sizes of local governments. While many empirical studies emphasized that grants encourage the growth of local public spending and local taxes constrain it, they are more silent regarding the effects of different types of tax autonomy. The paper addresses this issue by arguing that tax decentralization as organized on tax bases used only by local governments (tax-separation), rather than on tax-base sharing, would restrain local public expenditures. Using an unbalanced panel of OECD countries, the key finding is that only property taxes—mostly based on a “tax-separation” scheme—seem to favor smaller local governments. Thus, while tax decentralization is a necessary condition for limiting the growth of local governments, it does not appear sufficient, as tax-separation schemes among government levels would in fact be required. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Paolo Liberati & Agnese Sacchi, 2013. "Tax decentralization and local government size," Public Choice, Springer, vol. 157(1), pages 183-205, October.
  • Handle: RePEc:kap:pubcho:v:157:y:2013:i:1:p:183-205
    DOI: 10.1007/s11127-012-9937-9
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    More about this item

    Keywords

    H71; H77; H20; Fiscal decentralization; Tax sharing; Tax separation; Property taxes; Local government size;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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