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Fiscal Illusion, Intergovernmental Grants and Local Spending


  • Muhammed Islam


ISLAM M. N. (1998) Fiscal illusion, intergovernmental grants and local spending, Reg. Studies 32 , 63-71. This paper provides some evidence of fiscal illusion of a reduced tax-price of public service, engendered by provincial grants to local governments. A model of fiscal response to grants, based on expected vote maximization approach, is tested on time series data as well as pooled time series and cross-section data for 39 upper-tier municipalities in Ontario over the period 1977-91. A generalized two-stage least square procedure is used to estimate the model, adjusting for autocorrelation, heteroscedasticity in errors and simultaneity between grants and expenditures. The results show that the fiscally-induced price effects of grants varies quite widely from one municipality to another and these variations can be attributed to differences in municipal characteristics and their institutional relations with the province. Additionally, the results show evidence of considerable tax exporting (and importing) to (and from) non-residents. ISLAM M. N.(1998) L'illusion fiscale, les primes intergouvernementales et les depenses locales, Reg. Studies 32 , 63-71. Cet article fournit quelques preuves de ''l'illusion fiscale'' du prix des services publics assorti d'une reduction d'impot, ce qui s'explique par l'octroi des primes regionales aux administrations locales. A partir de la facon fondee sur la maximisation des votes attendus, un modele de la sensibilite de la fiscaliteaux primes se voit tester employant des donnees en serie temporelle aussi bien que des donnees en serie temporelle et par section representitative mises en commun pour 39 municipalites du niveau superieur en Ontario de 1977 a 1991. Une methode des moindres carres a deux etapes generalisee se voit employer afin d'estimer le modele, en ajustant pour l'autocorrelation, la possibilitedes erreurs diverses et la simultaneiteentre les primes et les depenses. Les resultats laissent voir que les effets-prix des primes provoques par la fiscalite varient de facon non-negligeable suivant la municipalite et ces variations peuvent etre attribuees aux caracteristiques particulieres des municipalites et a leurs rapports institutionnels avec la region. Qui plus est, les resultats font preuve d'une ''exportation d'impot'' (et d'une importation d'impot) a destination (et en provenance) des non-residents. ISLAM M. N. (1998) Finanzpolitische Illusionen, Zuschusse auf verschiedenen Regierungebenen und ortliche Aufwendungen, Reg. Studies 32 , 63-71. Dieser Aufsatz legt Anzeichen 'fiskalischer Illusionen' herabgesetzter Steuerkosten offentlicher Dienste vor, die durch Zuschusse der Provinzialregierung an Ortsverwaltungen erzeugt werden. Ein Modell fiskalischer Reaktion auf Zuschusse, das auf einem Ansatz zu erwartender Hochstabgabe von Stimmen beruht, wird sowohl auf Zeitseriendaten wie auf gemeinsame Zeitserien und Querschnittsdaten fur 39 stadtische Gemeindeoberverwaltungen in Ontario fur den Zeitraum 1977- 1991 gepruft. Ein verallgemeinertes, zwei Etappen umfassendes Least Squareverfahren wird dazu benutzt, das Modell zu schatzen, wobei Angleichungen zur Autokorrelation, Heteroskedastizitat bei Fehlern und Gleichzeitigkeit von Zuschussen und Ausgaben vorgenommen werden. Die Ergebnisse zeigen, dass die fiskalisch herbeigefuhrten Preisauswirkungen von Zuschussen von einer Stadtverwaltung zur andern sehr verschieden sind, und dass diese Abweichungen den Unterschieden im stadtischen Charakter und ihren institutionellen Beziehungen zu der Provinz zuzuschreiben sind. Ausserdem weisen die Ergebnisse Anzeichen betrachtlicher 'Steuerexporte' (und - importe) an (und von) nicht am Orte Ansassigen auf.

Suggested Citation

  • Muhammed Islam, 1998. "Fiscal Illusion, Intergovernmental Grants and Local Spending," Regional Studies, Taylor & Francis Journals, vol. 32(1), pages 63-71.
  • Handle: RePEc:taf:regstd:v:32:y:1998:i:1:p:63-71
    DOI: 10.1080/00343409850123620

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    References listed on IDEAS

    1. Slack, N Enid, 1980. "Local Fiscal Response to Intergovernmental Transfers," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 364-370, August.
    2. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 239-253.
    3. Islam, Muhammed N. & Choudhury, Saud A., 1989. "The flypaper effect and the revenue impact of grants-in-aid," Economics Letters, Elsevier, vol. 30(4), pages 351-356, October.
    4. Winer, Stanley L, 1983. "Some Evidence on the Effect of the Separation of Spending and Taxing Decisions," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 126-140, February.
    5. E. West & Stanley Winer, 1980. "Optimal fiscal illusion and the size of government," Public Choice, Springer, vol. 35(5), pages 607-622, January.
    6. Fisher, Ronald C., 1982. "Income and grant effects on local expenditure: The flypaper effect and other difficulties," Journal of Urban Economics, Elsevier, vol. 12(3), pages 324-345, November.
    7. McGuire, Martin, 1978. "A method for estimating the effect of a subsidy on the receiver's resource constraint: with an application to U.S. local governments 1964-1971," Journal of Public Economics, Elsevier, vol. 10(1), pages 25-44, August.
    8. Pommerehne, Werner W & Schneider, Friedrich, 1978. "Fiscal Illusion, Political Institutions, and Local Public Spending," Kyklos, Wiley Blackwell, vol. 31(3), pages 381-408.
    9. Dougan, William R & Kenyon, Daphne A, 1988. "Pressure Groups and Public Expenditures: The Flypaper Effect Reconsidered," Economic Inquiry, Western Economic Association International, vol. 26(1), pages 159-170, January.
    10. Logan, Robert R, 1986. "Fiscal Illusion and the Grantor Government," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1304-1318, December.
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    1. Nuria Boch Roca & Javier Suárez Pandiello, 2015. "Politics and Finance in Spanish Municipalities," Hacienda Pública Española, IEF, vol. 212(1), pages 51-66, March.


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