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Optimal Fiscal Policy for State and Local Government

  • Richard J. Arnott
  • Ronald E. Grieson

State and Local Government services are enjoyed by two groups, residents and non-residents: similarly, taxes are borne by both groups. This paper addresses the question: if state and local governments act so as to maximize their residents' welfare, and if they cannot distinguish between individual residents and non-residents but know the aggregate characteristics of the two groups, what set of taxes and public goods should they choose? Some of the results are: i) even when all goods are taxable and equity is ignored, the existence of non-resident consumption makes uniform taxation non-optimal; ii) in some non-trivial cases, whether a good should be taxed or subsidized is independent of its own-price elasticity; iii) central cities may be subsidized by suburban residents; and iv) the ability of state and local governments to redistribute is inversely proportional to the openness of the economy.

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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 291.

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Length: 44
Date of creation: 1978
Date of revision:
Handle: RePEc:qed:wpaper:291
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