The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions

By Sam Bucovetsky, M. Smart. Social Science Research Network, 2002

264 citations recorded by the source corpus.

This paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments, regardless of a wide variety of differences in regional tax capacity, tastes for public spending, and population. Thus, compared to other corrective devices, equalization achieves "robust" implementation. If aggregate tax bases are elastic, however, equalization leads to excessive taxation. Efficiency can be achieved by a modified formula that equalizes a fraction of local revenue deficiencies equal to the fraction of taxes that are shifted backward to factor suppliers.

Subfields: Accounting, Economics and Econometrics, Political Science and International Relations

View Paper: https://www.semanticscholar.org/paper/e4fe9f573100db244c58ad67cccf253fe6594210

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Citations in the corpus

Competing in Taxes and Investment under Fiscal Equalization (2008, background): “1: Plugging expressions (4) for equilibrium taxes into (6) we”
Ex-Post Redistribution in a Federation: Implications for Corrective Policy (2006, unknown): “As ∂ ∂T i si = − ∂ ∂T i sj , only 1− θ of the change in ex-post transfers ∂ ∂T i si enters the first-order condition (13).”
Does fiscal decentralization foster regional investment in productive infrastructure (2013, background): “4 See also Bucovetsky and Smart (2006) for analysis of the incentives effects of equalization transfers on tax-setting in a situation with tax competition.”
Tax Competition in a Fiscal Union with Decentralized Leadership (2003, background): “As shown in Smart [34], transfer competition (i.e. ∂ ∂ti si > 0) reduces welfare when not being complemented by tax competition.”
The Incentive Effect of Fiscal Equalization Transfers on Tax Policy (2006, background): “Bucovetsky and Smart (2002) base their argument on the impact of taxation on savings.”
The Theory and Practice of Equalization (2004, background): “The literature on this is relatively limited so far, although there are some specific examples where equalization can have beneficial effects on otherwise non-optimal regional decision-making (Bucovetsky and Smart, 2002).”
Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany (2010, unknown): “…suggesting that some mechanism – perhaps equalization grants—insulates these jurisdictions from fiscal competition.24 23Indeed, Köthenbürger (2002) and Bucovetsky and Smart (2006) show that, in the presence of horizontal tax competition, equalization grant may in a wide variety of settings…”
Do External Grants to District Governments Discourage Own Revenue Generation? A Look at Local Public Finance Dynamics in Ghana (2012, unknown): “For example, Bucovetsky and Smart (2006) and”