The Income Equalization System among Municipalities in Norway: Strengths and Implications

Johannes Idsø,Torbjørn Årethun,Bharat Bhatta

doi:10.3390/economies6020034

Johannes Idsø, Torbjørn Årethun + Show 1 more

Open Access

https://doi.org/10.3390/economies6020034

Copy DOI

Abstract

Norway is a leading nation pursuing egalitarian public policies. With an aim to smooth out income differences between municipalities and to stabilize individual municipality’s revenue over time, Norway has implemented a scheme called the income equalization system among municipalities. The scheme, which transfers revenue to poor municipalities, helps to maintain similar welfare services in all municipalities. We present and illustrate the model with data from all municipalities in Norway. We also demonstrate how the scheme helps stabilize tax revenue across municipalities over time. Furthermore, we show how the scheme can cause poor municipalities to have reduced incentives to increase their tax revenue.

Highlights

Equality of wealth, income and opportunity has always received much attention from scholars and decision-makers in a public policy worldwide (Corak 2013; Mankiw 2011; Stiglitz 2012; Blank 2002; World Bank 2006)
Despite extensive literature dealing with the efficiency costs of efforts/measures of income transfers from the rich to the poor, researchers have paid little attention to the social cost of inequality, the benefits of the equality of income, opportunity in the long term and measures to minimize the costs and augment the benefits; this is because social efficiency is at the cost of economic efficiency
The income equalization system (IES) helps to significantly reduce inequality of tax revenue per inhabitant among municipalities. It helps to stabilize revenue of municipalities. It reduces fluctuations in municipal revenues resulting from fluctuations in gross tax revenues

Summary

Introduction

Income and opportunity has always received much attention from scholars and decision-makers in a public policy worldwide (Corak 2013; Mankiw 2011; Stiglitz 2012; Blank 2002; World Bank 2006). In their recent work, Berg and Ostry (2011) discover that when growth is looked at over the long term, the trade-off between efficiency and equality may not exist They claim that equality seems to be an important element in promoting and sustaining economic growth. In the Scandinavian welfare states, this conflict is substantial due to the high ambitions regarding national equality and the decentralized, multileveled political structure (Karlsson 2015) This topic is important from a regional development and welfare perspective, which are key issues in public policy. As the IES, which involves both equality and efficiency, is a significant economic, political and social issue on how public policies are made, this paper makes several theoretical and empirical contributions to the literature on public policy. This paper should make a significant contribution to theory and practice of public policy

The Model

Symmetric Part

Financing Contribution

Data and Methods

Results and Discussion

Conclusions