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Tax decentralization notwithstanding regional disparities

Antonio Bellofatto and Martin Besfamille

Journal of Urban Economics, 2021, vol. 123, issue C

Abstract: In assessing tax decentralization optimality, a dilemma between efficiency and redistribution emerges: tax decentralization enhances fiscal discipline, but may also widen interregional disparities by triggering tax competition over mobile tax bases. We present a model that formalizes this trade-off, and find that tax decentralization can be optimal even under Rawlsian social preferences which only weight the welfare of the poorest region in the economy. We also revisit the empirical relationship between tax decentralization and regional disparities. Our estimates uncover a hump-shaped profile, which can be compatible with our normative prescriptions when social aversion for interregional inequality is low.

Keywords: Fiscal federalism; Tax competition; Regional disparities (search for similar items in EconPapers)
JEL-codes: H77 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Tax decentralization notwithstanding regional disparities (2019) Downloads
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DOI: 10.1016/j.jue.2021.103346

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