Does subnational tax autonomy promote regional convergence? Evidence from OECD countries, 1995–2011

Abstract

ABSTRACT This paper investigates the simultaneous impact of subnational tax autonomy and vertical transfers on regional disparities of gross domestic product (GDP) per head in a sample of 30 Organisation for Economic Co-operation and Development (OECD) countries over the period 1995–2011. Autonomously raised tax revenue as well as vertical transfers are shown to be potential drivers of regional convergence, although the negative marginal impact of transfers on disparities decreases and eventually turns positive as subnational governments are more transfer dependent. The results indicate that subnational tax autonomy should be sufficiently broad to allow less developed regions to expand their own revenue base and to catch up with their more developed counterparts.