Economic Risk and Political Risk in Fiscal Unions
A fiscal programme that redistributes income from rich to poor individuals indirectly redistributes tax revenues from regions hit by a favourable shock to regions hit by an unfavourable one. Centralised fiscal redistribution has therefore been advocated as a way to insure individuals against region-specific shocks. In this paper, we argue that a centralised fiscal policy, while reducing the uncertainty on the tax base, may create additional uncertainty on the tax rate. Using a simple model we show that the higher uncertainty on the policy instrument might more than offset the lower uncertainty on the tax base.
|Date of creation:||1994|
|Date of revision:|
|Publication status:||Published in Economic Journal|
|Contact details of provider:|| Postal: Littauer Center, Cambridge, MA 02138|
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