Fiscal Decentralization, Redistribution and Growth (original) (raw)
Related papers
2011
This paper analyzes the welfare implications of a transfer mechanism in a fiscally decentralized economy where local governments select their tax collection effort to maximize their lifetime utility. We consider a transfer rule that both punishes for the lack of efficiency in tax-collection and compensates for the deviation of pre-tax or transfer income from a target level; in addition, a portion of transfers is considered to be directed towards investment. Simulations of the model’s optimal solution reveal that increasing punishment always results in increased steady state effort, despite the disincentives that increasing income compensation or directed investment may generate. Increasing punishment also improves capital accumulation the lower the rate of directed investments and the lower the tax rate. Further, efficiency in tax collection is achieved the lower the rate of directed investment and the higher the punishment rate.
FISCAL DECENTRALIZATION , REDISTRIBUTION AND GROWTH Bilin
2011
This paper analyzes the welfare implications of a transfer mechanism in a fiscally decentralized economy where local governments select their tax collection effort to maximize their lifetime utility. We consider a transfer rule that both punishes for the lack of efficiency in tax-collection and compensates for the deviation of pre-tax or transfer income from a target level; in addition, a portion of transfers is considered to be directed towards investment. Simulations of the model’s optimal solution reveal that increasing punishment always results in increased steady state effort, despite the disincentives that increasing income compensation or directed investment may generate. Increasing punishment also improves capital accumulation the lower the rate of directed investments and the lower the tax rate. Further, efficiency in tax collection is achieved the lower the rate of directed investment and the higher the punishment rate. Key Terms: Fiscal decentralization, redistribution JE...
Fiscal decentralization and tax incentives in the developing world
Many developing countries use tax incentives to attract foreign direct investment, sacrificing immediate revenue from foreign capital, even though the effects of tax incentives on investment, growth, and revenue are empirically dubious. This leads to the puzzle of why states adopt tax incentives. Extant studies of tax incentive adoption overlook the fact that many countries have decentralized fiscal authority, allowing subnational governments to offer tax incentives. Public finance scholars argue that fiscal federalism intensifies tax competition among regions. Hence, drawing on the public finance scholarship, one may ask: Does fiscal decentralization lead to a race to the top among subnational governments and an oversupply of tax incentives in a country? This article argues that fiscal decentralization affects tax incentives in complex ways. When subnational governments are authorized to set tax policies, their politicians have economic and political incentives to engage in tax competition for mobile capital, providing more tax incentives in a country. However, the politicians are less likely to do so if they are held accountable and have to fund most expenditures through own-source tax revenues. An empirical analysis of over 50 developing countries in early 2000s produces robust supporting evidence. This research challenges both the view that fiscal decentralization is always beneficial and the view that horizontal competition invariably produces inefficiently low tax rates. The impact of fiscal decentralization on tax incentives and by implication, revenue mobilization depends on the design of the centrallocal government relations.
The role of direct taxes in fiscal decentralization
The aim of the paper is to review the economic theory of tax assignment across levels of government and the international experience in the use of direct taxespersonal income taxes and taxes on profits and on business value added -for fiscal decentralization. We highlight that as for other options of local taxation there are merits but also drawbacks in the use of direct taxes as a source of financing for sub-central governments and so the final choice about their use or not is a matter of judgment and depends on the political priority to be attached to different objectives, such as efficiency, equity, accountability, tax competition, administrative feasibility and revenue adequacy. 7 Ceteris paribus, when the state income tax can be deducted from the federal one, the value of the tax deductions increases with income; this results in a reduction in the effective degree of state tax progressivity compared with the statutory tax progressivity.
The Fiscal Interest Approach: The Design of Tax and Transfer Systems
SSRN Electronic Journal, 2000
The design of the fiscal system vitally shapes subnational government institutions, policy choices, and economic performance. In this chapter we focus on the fiscal interest approach, the idea that the specific arrangements of tax and transfer systems directly affect the interests and incentives of subnational political officials. These incentives therefore affect these governments' policy choices and, consequently, the performance of their jurisdictions. This chapter reviews several ideas in the literature that show how precisely this occurs. When the taxation and transfer system has subnational governments rely on own revenue generation from broad based taxes, subnational governments tend to be responsive to their residents' needs, the overall health of their economies, and more willing to provide market-enhancing public goods. An excessive reliance on central government transfers, on the other hand, has a detrimental effect on subnational incentives to assist the production of wealth. We provide and overview of how the type of tax that is assigned and the specific formula used to divide central government funds among subnational governments either rewards or punishes subnational government efforts at promoting growth and prosperity; and, similarly, whether it encourages subnational government spending beyond their means or promotes prudent fiscal management.
Revenue decentralization, the local income tax deduction, and the provision of public goods
2007
We consider a model where local and national governments both tax income and use the revenue to invest in both productive and consumptive public goods. Local governments will overprovide the consumptive public good if the local income tax is (partially) deductible. However, without full deductibility, local governments will underprovide local productive public goods. Hence, the central government will underinvest in both types of public goods. A national government that sets one national tax rate and provides transfers to the states results in lower welfare than one where states raise revenue, assuming the national government can set the local tax deduction.
Does Fiscal Decentralization Promote Fiscal Discipline?
2007
We investigate the efficiency and equity implications of a redistributive rule that takes into account both local tax collection efforts and deviation of local incomes from respective targets under alternative fiscal mechanisms. We show that, if the general budget constraint is binding, the proposed transfer rule leads to higher fiscal discipline under fiscal decentralization (FD) than under centralized redistribution. Although the centralized decision yields better income distribution than FD, FD also improves income distribution unambiguously when equalization across regions is targeted explicitly. When localities act strategically, the private sector's utility weight enhances the disciplinary effect of decentralization.
Federalism, Taxation, and Economic Growth
SSRN Electronic Journal, 2006
We present a model of endogenous growth where government provides a productive public good financed by income and capital taxes. In equilibrium, a decentralized government chooses tax policy to maximize economic growth, while a centralized government does not do so. Furthermore, these conclusions hold regardless of whether governments are beholden to a median voter or are rent-maximizing Leviathans. However, a decentralized government will under-provide public goods which benefit citizens directly, while a central government beholden to the median voter will optimally invest in such public goods.