Accountability and Subnational Tax Autonomy: When Do Politicians Lose Fiscal Interest?

Abstract

Devolving tax authority to lower-level jurisdictions in a federation is often argued to better align the actions of politicians with the wishes of voters. In this paper, we derive the conditions for tax autonomy to bring about local growth-enhancing policies - as the fiscal incentives approach of Weingast (2009) would predict - and investigate whether this is indeed beneficial to voter welfare. We add to the literature by modelling a multi-tiered, political agency setting where growth - enhancing policies produce additional public revenues. Rent-seeking incumbents can then improve their chances of re-election, by setting precisely such policies and using the additional revenues for pork-barrel targeting. Surprisingly, the resulting “discipline effect” proves stronger in a unitary setting, where all of public provision is kept at the center. However, given a certain degree of decentralisation and a sufficient amount of rent-seeking politicians, shoring up discipline via sharper fiscal incentives is more effectively done at lower levels of government. Expanding local tax autonomy will in this case unambiguously boost voter welfare.