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International Tax and Public Finance
Published in: International Tax and Public Finance 2/2019

08-06-2018

Horizontal versus vertical fiscal equalization: the assignment problem

Authors: Georg Anetsberger, Volker Arnold

Published in: International Tax and Public Finance | Issue 2/2019

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Abstract

We analyze a model in which the central government can establish a vertical equalization scheme, whereas the regional governments can set up a horizontal equalization scheme. The two levels of government decide in different chronological order. It turns out that, regardless of the timing, the central government always prevails—horizontal equalization does not take place. However, the subgame-perfect equilibrium is only Pareto-efficient, if the central government acts as a Stackelberg leader. Moreover, if the goal of achieving equality in living conditions across the regions is pursued in the model economy, the only suitable candidate for reaching this goal is vertical equalization.
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Appendix
Available only for authorised users
Footnotes
1
This simplification will be commented on further below.
 
2
Partial differentiation of a function \( f \) w.r.t. \( x \) is denoted with a subscript throughout this paper, i.e., \( f_{x} \equiv \partial f/\partial x. \)
 
3
Flatters et al. 1974, p. 104, Wellisch 1994, p. 178, Caplan et al. 2000, p. 270, Köthenbürger 2007, p. 485, Caplan and Silva 2011, p. 328, Duran-Vigneron 2012, p. 106/107.
 
4
A similar result is obtained by Boadway and Keen (1996, p. 140) but in a different context.
 
5
\( U_{y}^{i} > 0 \), \( U_{yy}^{i} < 0 \) for \( y \in \left\{ {x^{i} ,Z^{i} } \right\}. \)
 
6
The questions of existence, uniqueness and stability of migration equilibria were investigated by Boadway and Flatters (1982), Hartwick (1980) and Stiglitz (1977). See also Appendix 5.3.
 
7
The stability problem has been investigated extensively by Stiglitz (1977).
 
8
This statement results from (21) with \( U_{x}^{i} > 0 \) and \( N^{i} \ne 0 \) for \( i \in \left\{ {1,2} \right\} \).
 
9
This corresponds to the result obtained by Warr (1982) in a different context: “Donors respond to incremental fiscal redistributions by reducing their voluntary contributions by exactly a dollar for every dollar transferred in this way“(Warr 1982, p. 131).
 
10
“We can conclude that if the central government adopts a policy that implements the unitary state optimum, then any voluntary transfer will be completely crowded out. Of course, the above discussion is only suggestive since we have not analyzed when the various circumstances would occur. Further work is needed to characterize fully the relationship between the allocations under voluntary transfers and those of the unitary state optimum” (Boadway et al. 2003, p. 212).
 
11
“Such law (a federal law, A&A) … may also provide for grants to be made by the Federation to financially weak Länder from its own funds to assist them in meeting their general financial needs (supplementary grants).” Article 107 (2) of the Basic Law for the Federal Republic of Germany.
 
12
See Atkinson and Stiglitz, 1980, 338.
 
Literature
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Metadata
Title
Horizontal versus vertical fiscal equalization: the assignment problem
Authors
Georg Anetsberger
Volker Arnold
Publication date
08-06-2018
Publisher
Springer US
Published in
International Tax and Public Finance / Issue 2/2019
Print ISSN: 0927-5940
Electronic ISSN: 1573-6970
DOI
https://doi.org/10.1007/s10797-018-9499-y

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