Model Of Fiscal Federalism Research Articles

How economic integration affects the vertical structure of the public sector

This paper investigates the impact of economic integration on the vertical structure of the public sector within a country. To tackle this issue we set up a model of fiscal federalism, where economic integration is assumed to affect central government tax revenues. The main findings are that when an increase of the impact of economic integration brings about a reduction in central government tax revenues, under certain conditions: (a) it reduces central government expenditure; (b) it reduces general government expenditure; (c) it increases local taxation; (d) it increases the degree of public sector decentralization. Quite interestingly, these results are consistent with different patterns of local public spending and grants to local government.

Tax incentives in fiscal federalism: an integrated perspective

Abstract Models of fiscal federalism rarely account for the efficiency implications of intergovernmental fiscal ties for federal tax policy. This paper shows that fiscal institutions such that federal tax deductibility, vertical revenue‐sharing, and fiscal equalization (being common features of existing federations) encourage local taxation, but may discourage federal taxation. Furthermore, the structure of public spending is skewed towards local spending. We also show that, when considering Leviathan governments, fiscal institutions reduce confiscatory taxation by the federal government. The result is contrary to the Cartelization Hypothesis (Brennan and Buchanan 1980). Finally, we characterize the efficient design of intergovernmental fiscal ties.

The Impact of Economic Openness on the Vertical Structure of the Public Sector

The aim of this paper is to investigate the impact of economic openness on the vertical structure of the public sector within a country. To tackle this issue we set up a simple theoretical model of fiscal federalism, where both central and local public spending enter the objective functions of both a central government and an aggregate local public sector, accommodating a wide range of behaviours. The degree of economic openness is assumed to erode central tax revenues and through this channel to affect the size of central spending, the size of grants paid to local governments and the optimal amount of local public spending. Consequences on the degree of decentralization are investigated. The main findings are that for a large subset of parameters an increase in economic openness leads to: a) a lower level of central government expenditures; b) a lower level of general government expenditures; c) a higher level of local taxation; d) a higher degree of public sector decentralization. (This abstract was borrowed from another version of this item.)

Beyond the Big‐Bang Enlargement: Citizens' Preferences and the Problem of EU Decision Making

Given the increasing heterogeneity regarding economic structures, political interests, social preferences and financial constraints, governance problems in the EU will increase significantly. Based on a theoretical model of fiscal federalism, the question on which governance level political competencies should be located is addressed for the case of a heterogeneous union. The model suggests a distinct allocation of competencies in different policy fields depending upon the degree of country heterogeneity and the size of spillover effects of government services. Additionally, citizens' preferences regarding centralization and decentralization of policy prerogatives are analysed empirically. It is investigated whether the preferences are consistent with the theoretical implications, to what extent there are controversies within the groups of old and new EU members, and whether the scope for controversies changes within an enlarged union. Moreover, the preference distribution is used to simulate voting outcomes in the EU Council regarding the question of centralization. Finally, propositions are developed for a more flexible integration strategy that might help avoid a misallocation of political competencies.

On Government Centralization and Fiscal Referendums: A Theoretical Model and Evidence from Switzerland

We propose and test a positive model of fiscal federalism in which centralization is less likely to occur in jurisdictions with referendum decisions on policy centralization. Citizens choose centralization of public spending and revenue in order to internalize spillovers if individual preferences in two jurisdictions are sufficiently homogeneous. Under representative democracy, centralization is inefficiently high because representatives can extract political rents by policy centralization. Referendums thus restrict representatives' ability for rent extraction. An empirical analysis using a panel of Swiss cantons from 1980 to 1998 supports the hypothesis that centralization is less likely under referendum decision-making.

Devolution, Fiscal Federalism, and Changing Patterns of Municipal Revenues: The Mismatch between Theory and Reality

Devolution, Fiscal Federalism, and Changing Patterns of Municipal Revenues: The Mismatch between Theory and Reality

On Government Centralization and Budget Referendums: Evidence from Switzerland

Previous theoretical and empirical research has shown that policymakers have an incentive to centralize government activities in order to weaken the com-petitive pressure of fiscal federalism. We propose and test a positive model of fiscal federalism in which centralization is less likely to occur where budget referendums are possible. The reason for this result is that budget referendums reduce the extent to which pro-centralization regions can commit to a low level of spending delegating the centralization choice to elected poli-cymakers. In addition, it reduces the ability of higher level policy-makers to attract additional responsibilities in order to gain policy discretion. Empi-rical findings from a panel data analysis for Swiss cantons from 1980 to 1998 support this hypothesis.

Forming the Russian Model of Fiscal Federalism

Russian fiscal federalism is going through a complex, painful stage in its formation that is characterized on the one hand by the inevitable struggle between regions with fiscal traditions of the totalitarian state, and on the other, by the attempt to preserve Russia as a single whole, preventing the prevalence of local interests over national ones. The given stage is complicated by the accelerated imbalance of the fiscal system both vertically (i.e., at different fiscal levels) and horizontally (i.e., at the same level). While aggregate regional budget revenues had already exceeded expenditures in 1992, the consolidated regional budget deficit in 1993 reached approximately 3 trillion rubles, or 10 percent of expenditures. By 1994, the aggregate deficit totaled 18.6 trillion rubles, or 17.5 percent of expenditures (see Table 1).

Fiscal federalism and local public finance: A computable general equilibrium (CGE) framework

This paper attempts to make an argument for the feasibility and usefulness of a computable general equilibrium approach to studying fiscal federalism and local public finance. It begins by presenting a general model of fiscal federalism that has at its base a local public goods model with (1) multiple types of mobile agents who are endowed with preferences, private good endowments, and land endowments, (2) local governments that produce local public goods funded by a property tax, and (3) a land market that capitalizes local policies to equilibrate supply and demand. To this, a state (or national) government producing a state public good is added, and all levels of government abide by majority rule voting. A computable general equilibrium framework is derived from this theoretical model and calibrated to New Jersey micro tax data. It has been applied elsewhere to study the dominance of property in local tax bases as well as the general equilibrium effects of state or national intergovernmental programs such as redistributive grants in aid, district power equalization, and the deductibility of local taxes. Results in these areas are summarized and potential future applications discussed.

Optimal demogrants and taxes in a federal welfare state

This paper provides a framework for the simultaneous calculation of optimal commodity and income taxes in a federal framework with demogrants. The optimal income tax rate is shown to depend on a range of demographic and economic variables. Alternative models of fiscal federalism are proposed, and their implications for optimal commodity taxes and demogrants considered. Illustrative empirical evidence on Indian data confirms sensitivity of tax magnitudes to federal specification, and to assumptions about resource transfer between the federal and provincial authorities.