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Tax Decentralisation and local Government size

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  • Paolo Liberati
  • Agnese Sacchi

Abstract

The aim of this paper is to re-examine the relationship between fiscal federalism and the size of local governments. Traditionally, the empirical studies have focused on the different accountability power of grants and local taxes, concluding that the former encourages the growth and the latter contributes to contain local public spending. Yet, the existing literature is more silent about the possibility that different types of tax autonomy may still have differential impacts on the expansion of the local public sector. The paper addresses this issue by introducing a new testable hypothesis - the “Tax Separation Hypothesis” (TSH) - according to which tax decentralisation organised on tax bases used only by local governments would favour most the containment of local public expenditures, while that organised on tax base sharing (i.e. piggybacking mechanisms) is not expected to have a significant impact on the local government size. Using an unbalanced panel data set of OECD countries, we adopt the novel approach of disentangling the impact of local taxes - on income, property, and goods and services - on the size of the local public sector. In particular, property taxes only - mostly based on a “tax separation” scheme - seem to have a negative impact on the size of local government. Instead, both income taxes and general taxes on goods and services – often shared with central governments – have uncertain impacts on the size of local governments (and more frequently positive). We conclude that tax decentralisation is a necessary condition to contain local public expenditures, yet it is not sufficient, as a tax separation scheme would in fact be required.

Suggested Citation

  • Paolo Liberati & Agnese Sacchi, 2010. "Tax Decentralisation and local Government size," Departmental Working Papers of Economics - University 'Roma Tre' 0123, Department of Economics - University Roma Tre.
  • Handle: RePEc:rtr:wpaper:0123
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    References listed on IDEAS

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    Cited by:

    1. Alberto Batinti & Andrea Filippetti & Luca Andriani, 2017. "Why Does Social Capital Increase Government Performance? The Role of Local Elections across Italian Municipalities," Management Working Papers 13, Birkbeck Department of Management, revised Apr 2017.
    2. Lars Feld, 2014. "James Buchanan’s theory of federalism: from fiscal equity to the ideal political order," Constitutional Political Economy, Springer, vol. 25(3), pages 231-252, September.
    3. Sergio Beraldo & Massimo Bordignon & Simone Pellegrino & Massimiliano Piacenza & Gilberto Turati, 2017. "Fiscally Responsible Mafia-clans," Working papers 043, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    4. repec:eee:socmed:v:188:y:2017:i:c:p:69-81 is not listed on IDEAS
    5. Francese, Maura & Piacenza, Massimiliano & Romanelli, Marzia & Turati, Gilberto, 2014. "Understanding inappropriateness in health spending: The role of regional policies and institutions in caesarean deliveries," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 262-277.
    6. repec:taf:regstd:v:51:y:2017:i:4:p:507-522 is not listed on IDEAS
    7. Agnese Sacchi & Simone Salotti, 2017. "The influence of decentralized taxes and intergovernmental grants on local spending volatility," Regional Studies, Taylor & Francis Journals, vol. 51(4), pages 507-522, April.
    8. Davide Furceri & Agnese Sacchi & Simone Salotti, 2016. "Can Fiscal Decentralization Alleviate Government Consumption Volatility?," Open Economies Review, Springer, vol. 27(4), pages 611-636, September.
    9. Jorge Martinez-Vazquez & Santiago Lago-Peñas & Agnese Sacchi, 2017. "The Impact Of Fiscal Decentralization: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(4), pages 1095-1129, September.
    10. David Cantarero & Patricio Perez, 2012. "Decentralization and regional government size in Spain," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 11(3), pages 211-237, December.
    11. Sacchi, Agnese & Salotti, Simone, 2014. "The asymmetric nature of fiscal decentralization: theory and practice," MPRA Paper 54506, University Library of Munich, Germany.
    12. Cavalieri, Marina & Ferrante, Livio, 2016. "Does fiscal decentralization improve health outcomes? Evidence from infant mortality in Italy," Social Science & Medicine, Elsevier, vol. 164(C), pages 74-88.
    13. Presbitero, Andrea F. & Sacchi, Agnese & Zazzaro, Alberto, 2014. "Property tax and fiscal discipline in OECD countries," Economics Letters, Elsevier, vol. 124(3), pages 428-433.

    More about this item

    Keywords

    Fiscal decentralisation; Tax sharing; Tax separation; Property taxes; Local government size.;

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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