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Taxation with Representation: Intergovernmental Grants in a Plebiscite Democracy


  • Byron Lutz

    (Board of Governors of the Federal Reserve)


Economic theory suggests that intergovernmental grants are equivalent to private income. A large empirical literature, however, contradicts this prediction. A school finance reform in New Hampshire, where local public goods decisions are made by a form of direct democracy, provides an unusually compelling test of the theory. The results, which suggest that approximately ninety cents per grant dollar are spent on tax reduction, provide support for equivalence. The paper's findings have important policy implications for the financing of local public goods in general and for school finance reform in particular. .

Suggested Citation

  • Byron Lutz, 2010. "Taxation with Representation: Intergovernmental Grants in a Plebiscite Democracy," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 316-332, May.
  • Handle: RePEc:tpr:restat:v:92:y:2010:i:2:p:316-332

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    Cited by:

    1. Maria D. Fitzpatrick, 2014. "Intergovernmental (Dis)incentives, Free-Riding, Teacher Salaries and Teacher Pensions," Upjohn Working Papers and Journal Articles 15-220, W.E. Upjohn Institute for Employment Research.
    2. Federico Revelli, 2013. "Tax Mix Corners and Other Kinks," Journal of Law and Economics, University of Chicago Press, vol. 56(3), pages 741-776.
    3. Sylvain Leduc & Daniel Wilson, 2013. "Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 89-142.
    4. Keiser, David A. & Shapiro, Joseph S., 2016. "Consequences of the Clean Water Act and the Demand for Water Quality," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235437, Agricultural and Applied Economics Association.
    5. Leah Brooks & Justin Phillips & Maxim Sinitsyn, 2011. "The Cabals of a Few or the Confusion of a Multitude: The Institutional Trade-Off between Representation and Governance," American Economic Journal: Economic Policy, American Economic Association, vol. 3(1), pages 1-24, February.
    6. Paulo Arvate & Enlinson Mattos, Fabiana Rocha, 2015. "Intergovernmental transfers and public spending in Brazilian municipalities," Working Papers, Department of Economics 2015_03, University of São Paulo (FEA-USP).
    7. Vegh, Carlos A. & Vuletin, Guillermo, 2015. "Unsticking the flypaper effect in an uncertain world," Journal of Public Economics, Elsevier, vol. 131(C), pages 142-155.
    8. Heléne Lundqvist, 2015. "Granting public or private consumption? Effects of grants on local public spending and income taxes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(1), pages 41-72, February.
    9. Allers, Maarten A. & Vermeulen, Wouter, 2016. "Capitalization of equalizing grants and the flypaper effect," Regional Science and Urban Economics, Elsevier, vol. 58(C), pages 115-129.
    10. repec:kap:itaxpf:v:25:y:2018:i:1:d:10.1007_s10797-017-9442-7 is not listed on IDEAS
    11. Chang Liu & Guangrong Ma, 2016. "Taxation without representation: local fiscal response to intergovernmental transfers in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(5), pages 854-874, October.
    12. David A. Keiser & Joseph K. Shapiro, 2018. "Consequences of the Clean Water Act and the Demand for Water Quality," Center for Agricultural and Rural Development (CARD) Publications 17-wp571, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    13. Chakrabarti, Rajashri & Gorton, Nicole & Roy, Joydeep, 2018. "Getting ahead by spending more? Local community response to state merit aid programs," Staff Reports 872, Federal Reserve Bank of New York.
    14. Kattenberg, Mark & Vermeulen, Wouter, 2017. "The stimulative effect of an unconditional block grant on the decentralized provision of care," LSE Research Online Documents on Economics 86956, London School of Economics and Political Science, LSE Library.
    15. repec:taf:pubmmg:v:37:y:2017:i:4:p:285-292 is not listed on IDEAS
    16. Mark Kattenberg & Wouter Vermeulen, 2015. "The stimulative effect of an unconditional block grant on the decentralized provision of care," CPB Discussion Paper 308, CPB Netherlands Bureau for Economic Policy Analysis.
    17. Eric J. Brunner & Joshua Hyman & Andrew Ju, 2018. "School Finance Reforms, Teachers’ Unions, and the Allocation of School Resources," Working papers 2018-11, University of Connecticut, Department of Economics.
    18. repec:gam:jecomi:v:6:y:2018:i:2:p:34-:d:149313 is not listed on IDEAS
    19. Bev Dahlby & Ergete Ferede, 2016. "The stimulative effects of intergovernmental grants and the marginal cost of public funds," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 114-139, February.

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