Fiscal Externalities and Efficient Transfers in a Federation

Motohiro Sato

International Tax and Public Finance, 2000, vol. 7, issue 2, 119-139

Abstract: This paper investigates properties of the second best allocation in a fiscal federal system in which both federal tax and intergovernmental grants are involved and the taxation is distortionary. Also, optimal federal grants and tax policies in a decentralized fiscal system are examined. Our major findings are: (i) the second best does not require the equalization of marginal cost of public funds across regions in a conventional form; (ii) matching grants based on either the local tax rates or tax revenues should be introduced to internalize the tax externality; and (iii) once lump-sum and matching grants are optimized, federal tax policy becomes redundant so the optimal fiscal gap is indeterminate. Copyright Kluwer Academic Publishers 2000

Keywords: tax externality; equalization of MCPFs; matching grants; optimal fiscal gap (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (22)

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DOI: 10.1023/A:1008709203069

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