Tax Decentralization and Public Deficits in OECD Countries

Abstract

This article explores the effect of sub-national tax autonomy and sub-national control over shared taxes on primary deficits with panel data for 23 OECD countries over the 1975–2000 period. The results suggest that sub-national tax autonomy has a U-shaped effect on primary deficits. We find that the “average” country in the sample could increase the fiscal stability of its public sector by reducing sub-national tax autonomy. There is also some indication that sub-national control over shared taxes increases fiscal stability, but we obtain this result only if Belgium and Spain are included in the sample.