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Tax Capacity Disparities and Fiscal Equalization: The Case of Spanish Local Governments

Listed author(s):
  • Antoni Castells

    (University of Barcelona & Barcelona Institute of Economics)

  • Alejandro Esteller-Moré

    (University of Barcelona & Barcelona Institute of Economics)

  • Maite Vilalta

    (University of Barcelona & Barcelona Institute of Economics)

In the absence of an equalization grant system, like we justify occurs in Spain at the local level of government, those governments that bear a decrease in their level of tax capacity will have to adjust their budget either by increasing their level of tax effort, by reducing their level of public services and/or by incurring in a deficit. By means of a dynamic panel data analysis, and using a database from municipalities of the province of Barcelona (1993-99), we describe that process of fiscal adjustment. About a 25% of the shock is internalized through an increase in tax effort, a 35% through a reduction in public expenditure (mainly investment), while the rest (40%) is covered by an increase in the level of debt (i.e., the adjustment is delayed). However, this process of fiscal adjustment is very much influenced by the political situation of the municipality. Coalition and minority governments (“weak” governments) tend to delay the (unavoidable) fiscal adjustment, and a 70% of their shock is covered by an increase in the level of debt, while the rest of municipalities (“strong” governments) adjust immediately (80% reduction in public expenditure and 20% increase in tax effort). Leftist governments tend to react mostly through increases in tax effort, while rightist governments tend to reduce public expenditure to a greater extent. Finally, we find that municipalities tend to react differently in front of a negative (28%) and a positive (26%) shock with respect to the level of tax effort. Hence, municipalities are relatively reluctant to decrease taxes.

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Paper provided by EconWPA in its series Public Economics with number 0310006.

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Length: 40 pages
Date of creation: 23 Oct 2003
Handle: RePEc:wpa:wuwppe:0310006
Note: Type of Document - pdf; prepared on Win98; pages: 40
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  1. 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 613-633, November.
  2. Timothy Besley & Anne Case, 1995. "Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 769-798.
  3. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  4. Balassone, Fabrizio & Giordano, Raffaela, 2001. "Budget Deficits and Coalition Governments," Public Choice, Springer, vol. 106(3-4), pages 327-349, March.
  5. Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, vol. 32(2-3), pages 542-550, March.
  6. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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