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The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions
Author(s) -
BUCOVETSKY SAM,
SMART MICHAEL
Publication year - 2006
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2006.00255.x
Subject(s) - economics , tax competition , externality , equalization (audio) , revenue , tax revenue , competition (biology) , public economics , microeconomics , public finance , monetary economics , imperfect competition , population , tax reform , indirect tax , macroeconomics , finance , ecology , channel (broadcasting) , demography , sociology , electrical engineering , biology , engineering
This paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments, even in the presence of differences in regional tax capacity, tastes for public spending, and population. If aggregate tax bases are elastic, however, equalization leads to excessive taxation. Efficiency can be achieved by a modified formula that equalizes a fraction of local revenue deficiencies equal to the fraction of taxes that are shifted backward to factor suppliers.