Decentralizing Taxation and Public Expenditure within a Federation

A model of a central government and two local governments is used to study the role of fiscal federation in reducing the effect of revenue externalities between local jurisdictions. Immobile consumers buy goods in both their own and the other local community and pay sales taxes in each community. De...

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Bibliographic Details
Published in:Annales d'économie et de statistique 1997-01, Vol.45 (45), p.199-218
Main Authors: Hamilton, Jonathan H., Slutsky, Steven M.
Format: Article
Language:English
Subjects:
Communities
Decentralization
Federation
Income taxes
Jurisdiction
Local government
Municipal taxes
Nash equilibrium
Property taxes
Public expenditure
Public expenditures
Tax rates
Taxation
Total taxes
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Summary:A model of a central government and two local governments is used to study the role of fiscal federation in reducing the effect of revenue externalities between local jurisdictions. Immobile consumers buy goods in both their own and the other local community and pay sales taxes in each community. Depending on demand parameters, the fiscal externality may be positive or negative. In the former case, the local governments set tax rates below those a central government would choose. With a positive revenue externality, the central government can use the same tax bases as local governments to finance revenue sharing grants, stimulating local public expenditure, and thus raising welfare. If communities are heterogeneous, this revenue sharing system will not be fully optimal, but it can dominate a system of exclusive central revenue collection. /// Dans cet article, nous considérons une économie comptant deux communautés, deux gouvernements locaux et un gouvernment central. Les consommateurs achètent leurs biens soit dans leur communauté de résidence, soit dans l'autre s'acquittant de taxes indirectes dans chacune d'entre elles. Dans certaines conditions, l'externalité fiscale est positive et le gouvernement local adopte un taux de taxation inférieur à celui que choisirait le gouvernement central. Dans le cas auquel s'attache cet article, le gouvernement central peut utiliser la même assiette fiscale que le gouvernement local pour financer des subventions ayant pour effet d'accroître les dépenses publiques locales et partout le bien être.
ISSN:0769-489X
2272-6497
DOI:10.2307/20076056