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Mobility and Fiscal Imbalance

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  • Boadway, Robin
  • Tremblay, Jean-François

Abstract

We study how labor mobility affects optimal transfers in a federation and the fiscal imbalances that arise because of constraints on federal tax-transfer policies. Fiscal imbalance — a deviation from the optimal fiscal gap — occurs when the second-best allocation of resources in a federation cannot be achieved because fiscal transfers do not or cannot undo fiscal externalities among regional and federal governments. Under reasonable circumstances, we find that labor mobility increases the optimal fiscal gap, that is, increases the transfers required to achieve the second-best optimum. In a decentralized federation, the optimal fiscal gap cannot be achieved. In the absence of labor mobility, vertical fiscal externalities will apply. Regional governments will overspend, which will induce the federal government to create a negative fiscal imbalance to contain the size of its tax rate, assuming it can commit to future transfers. If the federal government cannot commit, regions will overspend even more and federal transfers will be excessive, leading to a positive fiscal imbalance. In both cases, mobility of labor mitigates the fiscal imbalance by reducing the tendency of regions to overspend.

Suggested Citation

  • 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.
  • Handle: RePEc:ntj:journl:v:63:y:2010:i:4:p:1023-53
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    Cited by:

    1. Annie Tubadji & Vassilis Angelis & Peter Nijkamp, 2016. "Endogenous intangible resources and their place in the institutional hierarchy," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 36(1), pages 1-28, February.
    2. Lisa Grazzini & Alessandro Petretto, 2012. "Revenue Equalization Systems in a Federation with Tax Evasion," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(3), pages 303-330, September.
    3. Bev Dahlby & Jonathan Rodden, 2013. "A political economy model of the vertical fiscal gap and vertical fiscal imbalances in a federation," Working Papers 2013/18, Institut d'Economia de Barcelona (IEB).

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