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Redistribution and Provision of Public Goods in an Economic Federation

  • Aronsson, Thomas

    ()

    (Department of Economics, Umeå University)

  • Blomquist, Sören

    ()

    (Department of Economics, Uppsala University, Box 513, SE – 751 20 Uppsala, Sweden)

This paper concerns redistribution and provision of public goods in an economic federation with two levels of government: a local government in each locality and a central government for the economic federation as a whole. We assume that each locality is characterized by two ability-types (high and low), and that their distribution differs between localities. The set of policy instruments facing the central government consists of a nonlinear income tax and a lump-sum transfer to each local government, while the local governments use proportional income taxes and the transfers from the central government to finance the provision of local public goods. The purpose is to characterize the tax and expenditure structure in a decentralized setting, where the central and local governments have distinct roles to play, and also compare this tax and expenditure structure with the second best resource allocation. We show how the redistributive role of taxation is combined with a corrective role, since tax base sharing among the central and local governments gives rise to a vertical fiscal external effect. In addition, the central government does not in general implement the second best resource allocation with the instruments at its disposal.

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Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 636.

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Length: 23 pages
Date of creation: 19 Apr 2004
Date of revision:
Handle: RePEc:hhs:umnees:0636
Contact details of provider: Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
Web page: http://www.econ.umu.se/
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  18. Hansson, Ingemar & Stuart, Charles, 1987. "The suboptimality of local taxation under two-tier fiscal federalism," European Journal of Political Economy, Elsevier, vol. 3(3), pages 407-411.
  19. Pettersson-Lidbom, Per & Dahlberg, Matz, 2003. "An Empirical Approach for Evaluating Soft Budget Constraints," Working Paper Series 2003:28, Uppsala University, Department of Economics.
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  23. Häkkinen, Iida & Uusitalo, Roope, 2003. "The Effect of a Student Aid Reform on Graduation: A Duration Analysis," Working Paper Series 2003:8, Uppsala University, Department of Economics.
  24. Thomas Aronsson & S�Ren Blomquist, 2008. "Redistribution and Provision of Public Goods in an Economic Federation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 125-143, 02.
  25. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
  26. Lindvall, Lars, 2003. "Does Public Spending on Youths Affect Crime Rates?," Working Paper Series 2004:3, Uppsala University, Department of Economics.
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  29. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May.
  30. Savvidou, Eleni, 2003. "The Relationship Between Skilled Labor and Technical Change," Working Paper Series 2003:27, Uppsala University, Department of Economics.
  31. Bergman, Mats, 2003. "When Should an Incumbent Be Obliged to Share its Infrastructure with an Entrant Under the General Competition Rules?," Working Paper Series 2003:25, Uppsala University, Department of Economics.
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  34. Eklöf, Matias, 2003. "Assessing Social Costs of Inefficient Procurement Design," Working Paper Series 2003:12, Uppsala University, Department of Economics.
  35. Thomas Aronsson & Magnus Wikström, 2001. "Optimal Taxes and Transfers in a Multilevel Public Sector," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(2), pages 158-, February.
  36. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  37. Thomas Aronsson & Magnus Wikstrom, 2003. "Optimal taxation and risk-sharing arrangements in an economic federation," Oxford Economic Papers, Oxford University Press, vol. 55(1), pages 104-120, January.
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