Federal tax-transfer policy and intergovernmental pre-commitment

Marko Koethenbuerger

Regional Science and Urban Economics, 2008, vol. 38, issue 1, 16-31

Abstract: Federal and state governments often differ in the capacity to pre-commit to expenditure and tax policy. Whether the implied sequence of public decisions has any efficiency implications is the subject of this paper. We resort to a setting which contrary to most of the literature does not exhibit a perfect tax-base overlap. We show that a federal government's pre-commitment capacity is welfare-improving. Efficiency, however, does not improve over all decision margins. The welfare-increasing policy entails a more distorted level of public consumption. Moreover, welfare may also improve if local governments are able to pre-commit towards the upper level. The rationale is that although federal transfers are formally unconditional they nevertheless entail a tax-price effect; thereby potentially counteracting incentives to engage in a "race to the bottom" in fiscal competition among local governments.

Date: 2008
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Related works:
Working Paper: Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:regeco:v:38:y:2008:i:1:p:16-31

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