OPTIMAL TAXATION AND RESOURCE TRANSFERS IN A FEDERAL NATION

M.N. Murty and Ranjan Ray
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M.N. Murty: Institute of Economic Growth

No 2, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: This paper analyses optimal commodity taxes in a federal nation under alternative models of fiscal federalism, namely, fully coordinated and non-co-operative fiscal behaviour of the federal and provincial authorities. Illustrative calculations for India confirm sensitivity of optimal commodity taxes to federal specification. The paper, then, extends the non-co-operative model to allow resource transfer from the Centre to the provinces. The paper also proposes computational procedures to estimate the federal and provincial components of optimal commodity tax. Illustrative empirical evidence suggests considerable potential for these procedures in future numerical applications.

Pages: 26 pages
Date: 1994-02
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