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Fiscal equalization under political pressures

Author

Listed:
  • Alejandro Esteller-Moré

    (Universitat de Barcelona & IEB)

  • Umberto Galmarini

    (Università dell’ Insubria & IEB)

  • Leonzio Rizzo

    (University of Ferrara & IEB)

Abstract

We examine the design of fiscal equalization transfers aimed at inter-regional redistribution in a setting in which special interest groups distort the fiscal policies of local governments. Equity always calls for tax-base equalization while efficiency calls for tax-base equalization of fiscal capacities backed by strong lobby groups and for tax-revenue equalization of those backed by weak lobby groups. Hence, it is optimal to rely only on tax-base equalization if the special interest groups are similar in terms of lobbying power, whereas a mixed system is optimal if they are highly heterogeneous. Tax competition reinforces the role of tax-base, while tax exporting that of tax-revenue, fiscal equalization.

Suggested Citation

  • Alejandro Esteller-Moré & Umberto Galmarini & Leonzio Rizzo, 2015. "Fiscal equalization under political pressures," Working Papers 2015/21, Institut d'Economia de Barcelona (IEB).
  • Handle: RePEc:ieb:wpaper:doc2015-21
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    More about this item

    Keywords

    Fiscal-capacity equalization-grants; inter-regional redistribution; tax competition; equity-efficiency tradeoff; special interest groups; lobbying;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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