On the states' behavior with equalization grants
This paper discusses how the state government's behavior is affected when the so-called Representative Tax System (RTS) equalization scheme is implemented. In particular, we study the changes in the marginal cost of the public funds (MCPF), and in the first order conditions for the optimal provision of a public input. A reduction in the MCPF is to be expected when lump-sum grants are replaced by RTS equalization transfers. However, this result has to be qualified under certain assumptions. Also we find that there does not exist an unambiguous relationship between the degree of fiscal equalization and the marginal cost of providing the public input and the tax setting. Production efficiency condition in the provision of public inputs holds with both types of vertical transfers.
|Date of creation:||2005|
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- Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," Munich Reprints in Economics 20129, University of Munich, Department of Economics.
- Martínez-López, Diego, 2005. "Fiscal federalism and public inputs provision: vertical externalities matter," Working Paper Series 0484, European Central Bank.
- Matsumoto, Mutsumi, 2004. "The mix of public inputs under tax competition," Journal of Urban Economics, Elsevier, vol. 56(2), pages 389-396, September.
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