Intergovernmental Fiscal Relations: The Efficiency Effect of Taxes, Transfers, and Fiscal Illusion

Julio López-Laborda and Antoni Zabalza
Additional contact information
Julio López-Laborda: Department of Public Economics, University of Zaragoza, Gran Vía, 2, 50005-Zaragoza, Spain
Authors registered in the RePEc Author Service: Julio López-Laborda

Environment and Planning C, 2015, vol. 33, issue 1, 136-162

Abstract: The purpose of this paper is to evaluate the efficiency cost of transfers. To this end, we develop a model of individual demand decisions about the provision of a regional public good that encompasses a continuum of tax—transfer scenarios to finance regional public expenditure. We assume that individuals have identical quasi-linear preferences defined over private consumption and the regional public good, that endowment income varies between individuals and regions, and that regions have different predetermined sizes. In an economy-wide resource constrained framework we show that, despite its simplicity, this model is capable of discriminating the efficiency properties of the different scenarios considered, and that the substitution of matching transfers for own-regional taxes always raises the provision of the regional public good, despite the resource-constrained nature of the exercise. The model allows very easily the analysis of equalising transfers, which we show to be distorting only when a matching element is present. We also find that, when transfers have a matching element, ‘fiscal illusion’ increases the elasticity of public good provision with respect to transfers, and suggest a potentially refutable hypothesis to identify the existence of this phenomenon.

Keywords: regional finance; taxes; transfers; fiscal illusion; flypaper effect (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://journals.sagepub.com/doi/10.1068/c12284r (text/html)

Related works:
Working Paper: Intergovernmental Fiscal Relations: the Efficiency Effect of Taxes, Transfers and Fiscal Illusion (2012)
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:sae:envirc:v:33:y:2015:i:1:p:136-162

DOI: 10.1068/c12284r

Access Statistics for this article

More articles in Environment and Planning C
Bibliographic data for series maintained by SAGE Publications ().