Intergovernmental Fiscal Relations: the Efficiency Effect of Taxes, Transfers and Fiscal Illusion

Julio López-Laborda and Antoni Zabalza

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: The purpose of this paper is to evaluate the efficiency cost of transfers. To this end, we develop a model of individual demand decisions about the provision of a regional public good that encompasses a continuum of tax/transfers scenarios to finance regional public expenditure. We assume that individuals have identical quasi-linear preferences defined over private consumption and the regional public good, that endowment income varies between individuals and regions and that regions have different predetermined sizes. We show that, despite its simplicity, this model is capable of discriminating the efficiency properties of the different scenarios considered, and that the substitution of transfers for own regional taxes always raises the provision of the regional public good. Our model yields the so called “flypaper effect” with no need to appeal to the existence of “fiscal illusion” by the part of the individual. We nevertheless find that “fiscal illusion” increases the elasticity of public good provision with respect to transfers, and we suggest two potentially refutable hypotheses to identify the existence of this phenomenon.

Keywords: Regional finance; taxes; transfers; fiscal illusion; flypaper effect (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012-09-19
New Economics Papers: this item is included in nep-geo, nep-pbe, nep-pub and nep-ure
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http://icepp.gsu.edu/files/2015/03/ispwp1229.pdf (application/pdf)

Related works:
Journal Article: Intergovernmental Fiscal Relations: The Efficiency Effect of Taxes, Transfers, and Fiscal Illusion (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ays:ispwps:paper1229

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