Tax Decentralisation and local Government size

Paolo Liberati and Agnese Sacchi

No 123, Departmental Working Papers of Economics - University 'Roma Tre' from Department of Economics - University Roma Tre

Abstract: The aim of this paper is to re-examine the relationship between fiscal federalism and the size of local governments. Traditionally, the empirical studies have focused on the different accountability power of grants and local taxes, concluding that the former encourages the growth and the latter contributes to contain local public spending. Yet, the existing literature is more silent about the possibility that different types of tax autonomy may still have differential impacts on the expansion of the local public sector. The paper addresses this issue by introducing a new testable hypothesis - the “Tax Separation Hypothesis” (TSH) - according to which tax decentralisation organised on tax bases used only by local governments would favour most the containment of local public expenditures, while that organised on tax base sharing (i.e. piggybacking mechanisms) is not expected to have a significant impact on the local government size. Using an unbalanced panel data set of OECD countries, we adopt the novel approach of disentangling the impact of local taxes - on income, property, and goods and services - on the size of the local public sector. In particular, property taxes only - mostly based on a “tax separation” scheme - seem to have a negative impact on the size of local government. Instead, both income taxes and general taxes on goods and services – often shared with central governments – have uncertain impacts on the size of local governments (and more frequently positive). We conclude that tax decentralisation is a necessary condition to contain local public expenditures, yet it is not sufficient, as a tax separation scheme would in fact be required.

Keywords: Fiscal decentralisation; Tax sharing; Tax separation; Property taxes; Local government size. (search for similar items in EconPapers)
JEL-codes: H2 H71 H77 (search for similar items in EconPapers)
Pages: 34
Date: 2010-06
New Economics Papers: this item is included in nep-acc, nep-pbe, nep-pub and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Tax decentralization and local government size (2013)
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