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Optimal Fiscal Policy for State and Local Government

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  • Richard J. Arnott
  • Ronald E. Grieson

Abstract

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.

Suggested Citation

  • Richard J. Arnott & Ronald E. Grieson, 1978. "Optimal Fiscal Policy for State and Local Government," Working Paper 291, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:291
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    Cited by:

    1. Bruno de Borger & Stef Proost, 2004. "Vertical and horizontal tax competition in the transport sector," Reflets et perspectives de la vie économique, De Boeck Université, vol. 0(4), pages 45-64.
    2. De Borger, B. & Proost, S. & Van Dender, K., 2005. "Congestion and tax competition in a parallel network," European Economic Review, Elsevier, vol. 49(8), pages 2013-2040, November.
    3. De Borger, Bruno & Proost, Stef, 2012. "Transport policy competition between governments: A selective survey of the literature," Economics of Transportation, Elsevier, vol. 1(1), pages 35-48.
    4. De Borger, Bruno & Dunkerley, Fay & Proost, Stef, 2009. "Capacity cost structure, welfare and cost recovery: Are transport infrastructures with high fixed costs a handicap?," Transportation Research Part B: Methodological, Elsevier, vol. 43(5), pages 506-521, June.
    5. Holger Kächelein, 2012. "Local Tax Competition and Indirect Tax Exportation," Public Finance Review, , vol. 40(5), pages 670-682, September.
    6. Kim, Junghun, 1998. "Local property taxation with external land ownership," Journal of Public Economics, Elsevier, vol. 68(1), pages 113-135, April.
    7. Stef Proost & Akshaya Sen, 2005. "Urban Transport Pricing Reform With Two Levels Of Government," Energy, Transport and Environment Working Papers Series ete0503, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.

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