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International Tax and Public Finance

Erschienen in:

08.06.2018

Horizontal versus vertical fiscal equalization: the assignment problem

verfasst von: Georg Anetsberger, Volker Arnold

Erschienen in: International Tax and Public Finance | Ausgabe 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.

Vorheriger Artikel How sensitive is the average taxpayer to changes in the tax-price of giving?

Nächster Artikel The impact of contingent liability realizations on public finances

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This simplification will be commented on further below.

Partial differentiation of a function \( f \) w.r.t. \( x \) is denoted with a subscript throughout this paper, i.e., \( f_{x} \equiv \partial f/\partial x. \)

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.

A similar result is obtained by Boadway and Keen (1996, p. 140) but in a different context.

\( U_{y}^{i} > 0 \), \( U_{yy}^{i} < 0 \) for \( y \in \left\{ {x^{i} ,Z^{i} } \right\}. \)

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.

The stability problem has been investigated extensively by Stiglitz (1977).

This statement results from (21) with \( U_{x}^{i} > 0 \) and \( N^{i} \ne 0 \) for \( i \in \left\{ {1,2} \right\} \).

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).

“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).

“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.

See Atkinson and Stiglitz, 1980, 338.

Anetsberger, G., & Arnold, V. (2017). Horizontal versus vertical fiscal equalization. Discussion-paper Nr. 505, Faculty of Economics, University of Hagen, Germany.

Arnold, V. (2005). Competitive versus cooperative federalism: Is a fiscal equalization scheme necessary from an allocative point of view? Journal of Economics and Statistics, Jahrbücher für Nationalökonomie und Statistik, 225, 259–282.

Atkinson, A. B., & Stiglitz, J. E. (1980). Lectures on public economics (1st ed.). New York: McGraw-Hill.

Boadway, R., Buettner, T., & Wildasin, D. E. (2008). New directions in fiscal federalism: Introduction. Journal of Public Economics, 92, 2285–2287.CrossRef

Boadway, R., Cuff, K., & Marchand, M. (2003). Equalization and the decentralization of revenue-raising in a federation. Journal of Public Economic Theory, 5, 201–228.CrossRef

Boadway, R., & Flatters, F. (1982). Efficiency and equalization payments in a federal system of governments: A synthesis and extension of recent results. Canadian Journal Economics, 15, 613–633.CrossRef

Boadway, R., & Keen, M. (1996). Efficiency and the optimal direction of federal-state transfers. International Tax and Public Finance, 3, 137–155.CrossRef

Buchanan, J. M., & Goetz, C. J. (1972). Efficiency limits of fiscal mobility: An assessment of the Tiebout model. Journal of Public Economics, 1, 25–43.CrossRef

Caplan, A. J., Cornes, R. C., & Silva, E. R. D. (2000). Pure public goods and income redistribution in a federation with decentralized leadership and imperfect labor mobility. Journal of Public Economics, 77, 265–284.CrossRef

Caplan, A. J., & Silva, E. C. D. (2011). Impure public goods, matching grand rates and income redistribution in a federation with decentralized leadership and imperfect labor mobility. International Tax and Public Finance, 18, 322–336.CrossRef

Duran-Vigneron, P. (2012). When transparency goes against efficiency: Fiscal equalization in a context of firm and household mobility. Journal of Public Economic Theory, 14, 99–130.CrossRef

Flatters, F., Henderson, V., & Mieszkowski, P. (1974). Public goods, efficiency, and regional fiscal equalization. Journal of Public Economics, 2, 99–112.CrossRef

Hartwick, J. M. (1980). The Henry George rule, optimal population and interregional equity. Canadian Journal of Economics, 13, 695–700.CrossRef

Köthenbürger, M. (2007). Ex-post redistribution in a federation: Implications for corrective policy. Journal of Public Economics, 91, 481–496.CrossRef

Krelove, R. (1992). Efficient tax exporting. Canadian Journal of Economics, 25, 145–155.CrossRef

Mansoorian, A., & Myers, G. M. (1993). Attachment to home and efficient purchases of population in a fiscal externality economy. Journal of Public Economics, 52, 117–132.CrossRef

Mansoorian, A., & Myers, G. M. (1997). On the consequences of government objectives for economies with mobile populations. Journal of Public Economics, 63, 265–281.CrossRef

Myers, G. M. (1990). Optimality, free mobility, and the regional authority in a federation. Journal of Public Economics, 43, 107–121.CrossRef

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Stiglitz, J. E. (1977). The theory of local public goods. In M. S. Feldstein & R. P. Inman (Eds.), The economics of public services (pp. 274–333). London: McMillan.CrossRef

Warr, P. G. (1982). Pareto optimal redistribution and private charity. Journal of Public Economics, 19, 131–138.CrossRef

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Titel: Horizontal versus vertical fiscal equalization: the assignment problem
verfasst von: Georg Anetsberger
Volker Arnold
Publikationsdatum: 08.06.2018
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 2/2019
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-018-9499-y

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