IDEAS home Printed from https://ideas.repec.org/p/tky/fseres/2008cf552.html
   My bibliography  Save this paper

Overlapping Tax Revenue, Local Debt Control and Soft-Budget Constraint

Author

Listed:
  • Toshihiro Ihori

    (Faculty of Economics, University of Tokyo)

Abstract

This paper investigates how the soft budget constraint with grants from the central government to local governments tends to internalize the vertical externality by stimulating insufficient local expenditure when both the central and local governments impose taxes on the same economic activities from public investment. The theoretical model incorporates local governments' rent-seeking activities in a multi- government setting with and without central controls on local borrowing. Two channels through debt issuance and public investment cause the soft budget outcome. In the unrestricted scheme of local debt issuance we have the positive effect on public investment and debt issuance although it would also stimulate wasteful rent seeking activities. In the restricted scheme of local debt issuance the soft budget case may not stimulate public investment since its effect through debt issuance is absent. In either case the soft budget constraint is welfare improving if the marginal valuation of central public goods is relatively small and/or the tax share of local government is relatively small.

Suggested Citation

  • Toshihiro Ihori, 2008. "Overlapping Tax Revenue, Local Debt Control and Soft-Budget Constraint," CIRJE F-Series CIRJE-F-552, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2008cf552
    as

    Download full text from publisher

    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2008/2008cf552.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Motohiro Sato, 2002. "Intergovernmental Transfers, Governance Structure and Fiscal Decentralization," The Japanese Economic Review, Japanese Economic Association, vol. 53(1), pages 55-76, March.
    2. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(4), pages 409-421, August.
    3. Besfamille, Martin & Lockwood, Ben, 2004. "Are Hard Budget Constraints for Sub-National Governments Always Efficient?," The Warwick Economics Research Paper Series (TWERPS) 717, University of Warwick, Department of Economics.
    4. Wildasin, David E., 2004. "The Institutions of Federalism: Toward an Analytical Framework," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(2), pages 247-272, June.
    5. Nobuo Akai & Motohiro Sato, 2005. "leadership meets soft budget," CIRJE F-Series CIRJE-F-391, CIRJE, Faculty of Economics, University of Tokyo.
    6. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 269-304, June.
    7. DelRossi, Alison F. & Inman, Robert P., 1999. "Changing the price of pork: the impact of local cost sharing on legislators' demands for distributive public goods," Journal of Public Economics, Elsevier, vol. 71(2), pages 247-273, February.
    8. Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank.
    9. Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 454-485, September.
    10. Torsten Persson & Lars E. O. Svensson, 1989. "Why a Stubborn Conservative would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 325-345.
    11. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Takero Doi & Toshihiro Ihori, 2006. "Soft-Budget Constraints and Local Expenditures," CIRJE F-Series CIRJE-F-422, CIRJE, Faculty of Economics, University of Tokyo.
    2. Toshihiro Ihori, 2010. "Overlapping Tax Revenue, Soft Budget, and Rent Seeking," CIRJE F-Series CIRJE-F-750, CIRJE, Faculty of Economics, University of Tokyo.
    3. Toshihiro Ihori, 2011. "Overlapping tax revenue, soft budget, and rent seeking," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(1), pages 36-55, February.
    4. Koethenbuerger, Marko, 2008. "Federal tax-transfer policy and intergovernmental pre-commitment," Regional Science and Urban Economics, Elsevier, vol. 38(1), pages 16-31, January.
    5. Boadway, Robin & Tremblay, Jean-François, 2012. "Reassessment of the Tiebout model," Journal of Public Economics, Elsevier, vol. 96(11), pages 1063-1078.
    6. Steve Billon, 2023. "Tax Competition and Leviathan with Decentralized Leadership," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 79(2), pages 93-110.
    7. Wallace Oates, 2005. "Toward A Second-Generation Theory of Fiscal Federalism," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 349-373, August.
    8. Akai, Nobuo & Sato, Motohiro, 2008. "Too big or too small? A synthetic view of the commitment problem of interregional transfers," Journal of Urban Economics, Elsevier, vol. 64(3), pages 551-559, November.
    9. Kalamov, Zarko & Staal, Klaas, 2023. "Too-big-to-fail in federations?," Regional Science and Urban Economics, Elsevier, vol. 101(C).
    10. Bouton, Laurent & Gassner, Marjorie & Verardi, Vincenzo, 2008. "Redistributing income under fiscal vertical imbalance," European Journal of Political Economy, Elsevier, vol. 24(2), pages 317-328, June.
    11. Robin Boadway & Jean-Francois Tremblay, 2005. "A Theory of Vertical Fiscal Imbalance," Working Papers 2006-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    12. Lisa Grazzini & Alessandro Petretto, 2006. "Vertical Tax Competition with Tax Sharing and Equalization Grants," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(1), pages 75-94, May.
    13. Sylvie Charlot & Sonia Paty & Virginie Piguet, 2015. "Does Fiscal Cooperation Increase Local Tax Rates in Urban Areas?," Regional Studies, Taylor & Francis Journals, vol. 49(10), pages 1706-1721, October.
    14. Thierry Madiès, 2008. "Do vertical tax externalities lead to tax rates being too high? A note," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 42(1), pages 225-233, March.
    15. Ida, Tomoya & Wilhelmsson, Mats, 2014. "An Empirical Test Of The Dominant Tax Externality In Sweden," Working Paper Series 14/5, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    16. Stephanie Armbruster & Beat Hintermann, 2020. "Decentralization with porous borders: public production in a federation with tax competition and spillovers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 606-642, June.
    17. Sotiris Karkalakos & Christos Kotsogiannis, 2007. "A spatial analysis of provincial corporate income tax responses: evidence from Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(3), pages 782-811, August.
    18. Thierry Madiès & Sonia Paty & Yvon Rocaboy, 2005. "Externalités fiscales horizontales et verticales. Où en est la théorie du fédéralisme financier ?," Revue d'économie politique, Dalloz, vol. 115(1), pages 17-63.
    19. Boadway, Robin & Tremblay, Jean-François, 2010. "Mobility and Fiscal Imbalance," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(4), pages 1023-1053, December.
    20. Matthieu Leprince & Thierry Madiès & Sonia Paty, 2007. "Business Tax Interactions Among Local Governments: An Empirical Analysis Of The French Case," Journal of Regional Science, Wiley Blackwell, vol. 47(3), pages 603-621, August.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2008cf552. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CIRJE administrative office (email available below). General contact details of provider: https://edirc.repec.org/data/ritokjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.