The Effects of Fiscal Decentralization on Household Income Inequality: Some Empirical Evidence

Abstract

In this paper we investigate the effects of fiscal decentralization on income inequality using a sample of 23 OECD countries over the period 1971-2000. We utilize novel and robust measures of fiscal decentralization based on different degrees of expenditure and tax autonomy of sub-central governments. Our results highlight the importance of both the nature of fiscal decentralization - expenditure versus taxation - and the extent to which responsibility and decision powers are actually assigned to local governments. A higher degree of tax decentralization is associated with higher household income inequality within a country. This suggests that even if fiscal decentralization could be attractive according to efficiency reasons, it may actually have undesirable consequences on the equity side.