Redistribution and Provision of Public Goods in an Economic Federation

Thomas Aronsson () and Sören Blomquist ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Sören Blomquist: Department of Economics, Uppsala University, Box 513, SE – 751 20 Uppsala, Sweden

No 636, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper concerns redistribution and provision of public goods in an economic federation with two levels of government: a local government in each locality and a central government for the economic federation as a whole. We assume that each locality is characterized by two ability-types (high and low), and that their distribution differs between localities. The set of policy instruments facing the central government consists of a nonlinear income tax and a lump-sum transfer to each local government, while the local governments use proportional income taxes and the transfers from the central government to finance the provision of local public goods. The purpose is to characterize the tax and expenditure structure in a decentralized setting, where the central and local governments have distinct roles to play, and also compare this tax and expenditure structure with the second best resource allocation. We show how the redistributive role of taxation is combined with a corrective role, since tax base sharing among the central and local governments gives rise to a vertical fiscal external effect. In addition, the central government does not in general implement the second best resource allocation with the instruments at its disposal.

Keywords: Redistribution; fiscal external effects; nonlinear taxation (search for similar items in EconPapers)
JEL-codes: D60 H21 H23 H77 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm, nep-geo, nep-pbe, nep-pol and nep-pub
Date: 2004-04-19
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Related works:
Working Paper: Redistribution and Provision of Public Goods in an Economic Federation (2004)
Journal Article: Redistribution and Provision of Public Goods in an Economic Federation (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:hhs:umnees:0636

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