Grants and Marginal Cost of Public Funding: Empirical Evidence for Local Governments in Brazil

Enlinson Mattos, Rafael Cardim and Ricardo Politi

Revista Brasileira de Economia - RBE, 2018, vol. 72, issue 4

Abstract: This paper documents empirical evidence on price-effect caused by lumpsumgrants for local governments in Brazil between 2006 to 2010. Dahlby(2011) demonstrates theoretically that lump-sum grants can reduce thecost of public goods provision (price-effect), in addition to the traditionalincome effect. Our contributions are threefold. First we estimated semielasticityof the effects of tax rate changes on tax base (−0.016). Second, wecalculate the MCF of the local tax imposed on the supply of services (ISS)for Brazilian municipalities (average of 0.04). Finally, we estimate the priceeffectestimation for ISS tax. Our results suggests that for the entire sample,that an increase in R$ 1.00 in per capita unconditional transfers reducesthe local price effect (MCF) around 0.07%, but this result is not consistentlyestimated across all subsamples.

Date: 2018
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