On the states' behavior with equalization grants

Diego Martínez

No E2005/03, Economic Working Papers at Centro de Estudios Andaluces from Centro de Estudios Andaluces

Abstract: This paper discusses how the state government's behavior is affected when the so-called Representative Tax System (RTS) equalization scheme is implemented. In particular, we study the changes in the marginal cost of the public funds (MCPF), and in the first order conditions for the optimal provision of a public input. A reduction in the MCPF is to be expected when lump-sum grants are replaced by RTS equalization transfers. However, this result has to be qualified under certain assumptions. Also we find that there does not exist an unambiguous relationship between the degree of fiscal equalization and the marginal cost of providing the public input and the tax setting. Production efficiency condition in the provision of public inputs holds with both types of vertical transfers.

Keywords: Fiscal federalism; MCPF; vertical transfers. (search for similar items in EconPapers)
JEL-codes: H71 H72 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2005
New Economics Papers: this item is included in nep-pbe
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Journal Article: On states’ behavior with equalization grants (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:cea:doctra:e2005_03

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