Efficiency and the optimal direction of federal-state transfers
It seems to be widely believed that the case for centralising revenue-raising is stronger than that for centralising expenditure decisions, so that federal governments should typically make transfers to lower level "state" governments. This paper argues, however, that pure efficiency considerations may plausibly point in exactly the opposite direction. This arises becauses of a "vertical" fiscal externality: the typical state may neglect the impact that its tax decisions have on the federal tax base. The optimal federal response is to internalise this distortion of state decisions by means of offsetting subsidy on the common tax base, the financing of which may plausibly require transfers from the states.
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|Date of creation:||Jan 1996|
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References listed on IDEAS
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- Robin W. Boadway & Michael Keen, 1994. "Efficiency and the Fiscal Gap in Federal Systems," Working Papers 915, Queen's University, Department of Economics.
- Russell Krelove, 1992. "Efficient Tax Exporting," Canadian Journal of Economics, Canadian Economics Association, vol. 25(1), pages 145-55, February.
- Brennan, G. & Pincus, J. J., 1996.
"A minimalist model of federal grants and flypaper effects,"
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Elsevier, vol. 61(2), pages 229-246, August.
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- Roger H. Gordon, 1982.
"An Optimal Taxation Approach to Fiscal Federalism,"
NBER Working Papers
1004, National Bureau of Economic Research, Inc.
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- Boadway, Robin, 1982. "On the Method of Taxation and the Provision of Local Public Goods: Comment," American Economic Review, American Economic Association, vol. 72(4), pages 846-51, September.
- Myers Gordon M. & Papageorgiou Yorgos Y., 1993. "Fiscal Inequivalence, Incentive Equivalence and Pareto Efficiency in a Decentralized Urban Context," Journal of Urban Economics, Elsevier, vol. 33(1), pages 29-47, January.
- Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
- 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.
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