EconPapers    
Economics at your fingertips  
 

Revenue vs expenditure based fiscal consolidation: the pass-through from federal cuts to local taxes

Luigi Marattin (), Tommaso Nannicini and Francesco Porcelli
Additional contact information
Luigi Marattin: University of Bologna

International Tax and Public Finance, 2022, vol. 29, issue 4, No 2, 834-872

Abstract: Abstract A growing literature emphasizes that the output effect of fiscal consolidation hinges on its composition, as the choice of increasing revenues vs cutting expenditure is not neutral. Existing studies, however, underscore the role of local governments in a federal setting. Indeed, transfer cuts at the central level might translate into higher local taxes, changing the effective composition of the fiscal adjustment. We evaluate this transmission mechanism in Italy, where municipalities below the threshold of 5,000 inhabitants were exempted from (large) transfer cuts in 2012. This allows us to implement a difference-in-discontinuities design in order to estimate the causal impact of transfer cuts on the composition of fiscal adjustment, also because tight fiscal rules impose a balanced budget on Italian municipalities. We find a pass-through mechanism by which local governments react to the contraction of intergovernmental grants by mainly increasing taxes rather than reducing spending. From a political economy perspective, this revenue based fiscal consolidation is driven by local governments with low electoral competition and low party fragmentation.

Keywords: Fiscal consolidation; Intergovernmental grants; Difference-in-discontinuities (search for similar items in EconPapers)
JEL-codes: D7 H2 H77 H87 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s10797-021-09682-1 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Revenue vs Expenditure Based Fiscal Consolidation: The Pass-Trough from Federal Cuts to Local Taxes (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:29:y:2022:i:4:d:10.1007_s10797-021-09682-1

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/10797/PS2

DOI: 10.1007/s10797-021-09682-1

Access Statistics for this article

International Tax and Public Finance is currently edited by Ronald B. Davies and Kimberly Scharf

More articles in International Tax and Public Finance from Springer, International Institute of Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2025-03-22
Handle: RePEc:kap:itaxpf:v:29:y:2022:i:4:d:10.1007_s10797-021-09682-1