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The Progressivity of Equalization Payments in Federations

  • Nicolas Gravel

    ()

    (Centre de Sciences Humaines (CSH), Delhi & IDEP-GREQAM)

  • Michel Poitevin

    ()

    (CIREQ and Department of economics, université de Montréal)

We investigate the conditions under which an inequality averse and additively separable welfarist constitution maker would always choose to set up a progressive equalization payment scheme in a federation with local public goods. A progressive equalization payment scheme is defined as a list of per capita net (possibly negative) subsidies – one such net subsidy for every jurisdiction - that are decreasing with respect to jurisdictions per capita wealth. We examine the question in a setting in which the case for progressivity is a priori the strongest, namely, all citizens have the same utility function for the private good and the public good, inhabitants of a given jurisdiction are all identicals and are not able to move accross jurisdictions. We show that a necessary and sufficient condition that the objective function of the constitution maker must satisfy to favour a progressive equalization payment scheme for all distributions of wealth and all population sizes is to be additively separable between each jurisdiction’s per capita wealth and number of inhabitants. When interpreted for a mean of order social welfare function, this condition is shown to be equivalent to additive separability of the individual’s indirect utility function with respect to wealth and the price of the public good. Some implications of this restriction to the case where the citizen direct utility function is additively separable are also derived.

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Paper provided by Institut d'economie publique (IDEP), Marseille, France in its series IDEP Working Papers with number 0408.

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Length: 20 pages
Date of creation: Jul 2004
Date of revision: Jul 2004
Handle: RePEc:iep:wpidep:0408
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  1. Blackorby, Charles & Donaldson, David, 1982. "Ratio-Scale and Translation-Scale Full Interpersonal Comparability without Domain Restrictions: Admissible Social-Evaluation Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(2), pages 249-68, June.
  2. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
  3. Eichhorn, Wolfgang & Funke, Helmut & Richter, Wolfram F., 1984. "Tax progression and inequality of income distribution," Journal of Mathematical Economics, Elsevier, vol. 13(2), pages 127-131, October.
  4. R. Boadway & K. Cuff & M. Marchand, 2001. "Equalization and the Decentralization of Revenue-Raising in a Federation," Department of Economics Working Papers 2001-04, McMaster University.
  5. Flatters, Frank & Henderson, Vernon & Mieszkowski, Peter, 1974. "Public goods, efficiency, and regional fiscal equalization," Journal of Public Economics, Elsevier, vol. 3(2), pages 99-112, May.
  6. Kolm, Serge-Christophe, 1976. "Unequal inequalities. I," Journal of Economic Theory, Elsevier, vol. 12(3), pages 416-442, June.
  7. Kolm, Serge-Christophe, 1976. "Unequal inequalities. II," Journal of Economic Theory, Elsevier, vol. 13(1), pages 82-111, August.
  8. Buhl, Hans Ulrich & Pfingsten, Andreas, 1990. "On the distribution of public funds," European Journal of Political Economy, Elsevier, vol. 6(3), pages 363-376, December.
  9. Moyes, Patrick, 1987. "A new concept of Lorenz domination," Economics Letters, Elsevier, vol. 23(2), pages 203-207.
  10. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  11. Thon, Dominique, 1987. "Redistributive properties of progressive taxation," Mathematical Social Sciences, Elsevier, vol. 14(2), pages 185-191, October.
  12. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
  13. Jakobsson, Ulf, 1976. "On the measurement of the degree of progression," Journal of Public Economics, Elsevier, vol. 5(1-2), pages 161-168.
  14. Sen, Amartya, 1973. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198281931, March.
  15. Atkinson, Anthony B & Bourguignon, Francois, 1982. "The Comparison of Multi-Dimensioned Distributions of Economic Status," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 183-201, April.
  16. Moyes Patrick, 1994. "Inequality Reducing and Inequality Preserving Transformations of Incomes: Symmetric and Individualistic Transformations," Journal of Economic Theory, Elsevier, vol. 63(2), pages 271-298, August.
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