The Optimal Taxation Approach to Intergovernmental Grants

Bev Dahlby ()

No 2009-16, Working Papers from University of Alberta, Department of Economics

Abstract: An optimal tax system equates the marginal cost of public funds across all tax bases. This idea is applied to a federation to derive the optimal unconditional transfers that will promote an optimal allocation of taxation and expenditures among the governments in the federation. This approach provides insights into the concepts of vertical and horizontal fiscal imbalance, fiscal capacity, and fiscal need. Expressions for the optimal fiscal equalization grant and the optimal vertical fiscal gap are derived. We also show how the marginal cost of public funds affects the optimal matching grant rate for activities that generate expenditure externalities.

Keywords: intergovernmental grants; median voter model; fiscal federalism; vertical fiscal gap; vertical fiscal imbalance; fiscal capacity; fiscal need (search for similar items in EconPapers)
JEL-codes: H21 H71 H72 H77 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2009-03-10
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2009_016

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