Fiscal equalization under political pressures

Alejandro Esteller-Moré (), Umberto Galmarini () and Leonzio Rizzo ()
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Alejandro Esteller-Moré: Universitat de Barcelona & IEB
Umberto Galmarini: Università dell’ Insubria & IEB

No 2015/21, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: We examine the design of fiscal equalization transfers aimed at inter-regional redistribution in a setting in which special interest groups distort the fiscal policies of local governments. Equity always calls for tax-base equalization while efficiency calls for tax-base equalization of fiscal capacities backed by strong lobby groups and for tax-revenue equalization of those backed by weak lobby groups. Hence, it is optimal to rely only on tax-base equalization if the special interest groups are similar in terms of lobbying power, whereas a mixed system is optimal if they are highly heterogeneous. Tax competition reinforces the role of tax-base, while tax exporting that of tax-revenue, fiscal equalization.

Keywords: Fiscal-capacity equalization-grants; inter-regional redistribution; tax competition; equity-efficiency tradeoff; special interest groups; lobbying (search for similar items in EconPapers)
JEL-codes: D72 H21 H77 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2015
New Economics Papers: this item is included in nep-pbe, nep-pol and nep-ure
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Citations: View citations in EconPapers (3)

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