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Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment

  • Marko Köthenbürger

Federal and state governments often differ in the capacity to pre-commit to expenditure and tax policy. Whether the implied sequence of public decisions has any efficiency implications is the subject of this paper. We resort to a setting which contrary to most of the literature does not exhibit a perfect tax-base overlap. We show that a federal government's pre-commitment capacity is welfare-improving. Efficiency, however, does not improve over all decision margins. The welfare-increasing policy entails a more distorted level of public consumption. Moreover, welfare may also improve if local governments are able to pre-commit towards the upper level. The rationale is that although federal transfers are formally unconditional they nevertheless entail a tax-price effect; thereby potentially counteracting incentives to engage in a “race to the bottom” in fiscal competition among local governments.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2054.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2054
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