Fiscal externalities and the design of intergovernmental grants

Dahlby, Bev

doi:10.1007/bf00418952

Cited by 175 publications

(128 citation statements)

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“…Finally, as the provision of expenditure matching grants constitutes an instrument for correcting positive externalities induced by local public input provision (see, e.g., Dahlby, 1996) we expand our model and derive the intuitive result that a higher federal co-financing rate encourages local jurisdictions to rebalance their budgets towards a higher share of public inputs.…”

Section: Discussionmentioning

confidence: 99%

“…We find that a higher degree of redistribution induces the local governments to rebalance their expenditure towards a higher share of purely consumptive spending. As the provision of federal expenditure matching grants constitutes a way of correcting positive fiscal externalities due to public input provision (see, e.g., Dahlby, 1996) we also expand our framework in order to analyse the effects of federal co-financing on the pattern of local public spending.…”

Section: Introductionmentioning

confidence: 99%

“…A possibility for correcting such inefficiencies in local public spending is to introduce expenditure matching grants by the federal government (e.g. Dahlby, 1996). Therefore, we extend our model by assuming that the federal government covers local spending on the public input P i up to the matching rate m i .…”

Section: Introducing Matching Grantsmentioning

confidence: 99%

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Intergovernmental Grants and Public Input Provision: Theory and Evidence from Germany

Hauptmeier

2007

SSRN Journal

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp07006.pdf Non-Technical SummaryThere exists a broad literature on fiscal competition which, so far, has mainly focussed on the aspect of tax competition. The standard argument states that competing governments lower their tax rates in order to attract a mobile tax base, thereby neglecting negative externalities which arise for other jurisdictions. The bottom line is an inefficiently low level of taxation and a relative underprovision of public goods. Recent theoretical literature suggests that fiscal externalities resulting from tax competition tend to be internalised by redistributive grant systems, thereby raising efficiency of local public finances. Empirical research supports the view that revenue sharing exerts a strong impact on jurisdictions' tax policy.An aspect which has attracted far lesser attention in the literature on fiscal competition is that local governments may also compete for mobile tax bases via the provision of productivity-enhancing public goods. Theoretical research suggests that fiscal competition in the presence of a public input to production leads to a bias in the local spending mix, i.e. a relative overprovision of this public input and a relative underprovision of a purely consumptive public good. Here, we use a simple model of fiscal competition and introduce a system of redistributive grants. As we assume tax policy to be coordinated at the federal level, local jurisdictions can only attract the mobile tax base by providing a productivity-enhancing public input. Using this framework of "expenditure competition" we analyse how fiscal equalisation transfers affect the local spending mix. We find that a higher degree of redistribution induces the local governments to rebalance their expenditure towards a higher share of purely consumptive spending. As the provision of federal expenditure matching grants constitutes a way of correcting positive fiscal externalities due to public input provision we also expand our framework in order to analyse the effects of federal co-financing on the pattern of local public spending.The implications from the theoretical analysis are finally tested in the course of an empirical analysis of German state expenditure policies. Germany is a very interesting case to study in this context as tax rates for the most important tax sources are set coordinately at the federal level and, on the other hand, states can rather f...

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Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Intergovernmental Grants and Public Input Provision: Theory and Evidence from Germany

Hauptmeier

2007

SSRN Journal

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“…Furthermore, among Canadian provinces Ontario is argued to have the capacity to pre-commit since 40% of federal tax revenues stem from Ontario (Dahlby, 1996). In the European Union (EU) it is controversially debated whether Brussels has the ability to pre-commit toward member states.…”

Section: Introductionmentioning

confidence: 99%

Federal tax-transfer policy and intergovernmental pre-commitment

Koethenbuerger¹

2008

Regional Science and Urban Economics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Federal and state governments often differ in the capacity to pre-commit to expenditure and tax policy. Whether the implied sequence of public decisions has any efficiency implications is the subject of this paper. We resort to a setting which contrary to most of the literature does not exhibit a perfect tax-base overlap. We show that a federal government's pre-commitment capacity is welfare-improving. Efficiency, however, does not improve over all decision margins. The welfare-increasing policy entails a more distorted level of public consumption. Moreover, welfare may also improve if local governments are able to pre-commit towards the upper level. The rationale is that although federal transfers are formally unconditional they nevertheless entail a tax-price effect; thereby potentially counteracting incentives to engage in a "race to the bottom" in fiscal competition among local governments. Terms of use: Documents inJEL Code: H71, H23, H10.

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“…11 Vertical tax overlap, i.e. concurrent taxation of the same tax base is quite pervasive in many OECD countries, and tax externalities -particularly excessive tax rates -could arise if one government level does not allow for the impact of its tax policy on another government level (Dahlby, 1996). Vertical externalities tend to be relevant if both government levels tax a mobile base such as personal or corporate income (Keen and Kotsogiannis, 2002;Esteller-Moré and Solé-Ollé, 2001) However, since it is not clear which government level is actually responsible for vertical externalities, the question of who has to compensate whom remains open, and grants could as well flow from the subcentral to the central level (Keen, 1997).…”

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confidence: 99%

Taxes or Grants

Blöchliger

Petzold

2009

OECD Economics Department Working Papers

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JT03267642This paper analyses trends in and driving forces of the revenue composition of sub-central governments (SCG). Between 1995 and 2005 the share of SCG in total government spending increased from 31 to 33%, while the SCG tax share remained stable at around 17%, increasing SCG's dependence on intergovernmental grants. While equal access to public services is the most common justification for such grants, the grant systems of most countries are much larger than required by equalization. Moreover, rather than smoothing out SCG revenue fluctuations over the cycle, grants often tend to exacerbate them. Finally, there is some evidence that grants reduce SCG tax raising effort, inflate SCG spending and increase SCG deficits and debt. The economic crisis will both sharply reduce SCG's own tax revenues and -via budget constraints at the central levelincrease pressure on the grant system. The crisis could hence help rethink the SCG revenue mix, their tax structure and the size and design of intergovernmental transfers. JEL classification: H42, H50, H77Keywords: Fiscal federalism; local taxation; intergovernmental grants +++++++++++++++ Impôts ou transferts : quels revenus pour les administrations infra-nationales ?Ce papier analyse les tendances et les déterminants de la composition des revenus des administrations infra-nationales (AI). Entre 1995 et 2005, la part des dépenses des AI dans les dépenses publiques totales a augmenté de 31 à 33%, alors que leur participation aux recettes fiscales restait stable autour de 17%, accentuant de ce fait la dépendance des AI envers les transferts intergouvernementaux. Bien que l'égalité d'accès aux services publics soit la raison la plus souvent invoquée pour justifier ces transferts, les systèmes de transferts sont en réalité souvent bien plus importants que ceux qu'impliquerait la simple péréquation. Par ailleurs, les transferts ont tendance à amplifier plutôt qu'à réduire les fluctuations de revenus au cours du cycle. Finalement, il semblerait que les transferts réduisent l'effort fiscal des AI tout en augmentant leurs dépenses et donc leurs déficits et leur dette. La crise économique en cours à la fois va réduire fortement les impôts propres des AI et -suite aux contraintes budgétaires au niveau centralaugmenter la pression sur le système des transferts. La crise pourrait donc inciter à repenser la composition des revenues des AI, la structure de leurs impôts et la taille et le design des transferts intergouvernementaux.

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Fiscal externalities and the design of intergovernmental grants

Abstract: fiscal federalism, fiscal externalities, intergovernmental grants, tax exporting, tax competition,

Cited by 175 publications

References 21 publications

Intergovernmental Grants and Public Input Provision: Theory and Evidence from Germany

Intergovernmental Grants and Public Input Provision: Theory and Evidence from Germany

Federal tax-transfer policy and intergovernmental pre-commitment

Taxes or Grants

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