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Tax decentralization notwithstanding regional disparities

Antonio Bellofatto () and Martin Besfamille ()

No 7607, CESifo Working Paper Series from CESifo

Abstract: In assessing the desirability for tax decentralization reforms, a dilemma between efficiency and redistribution emerges. By limiting the ability of the central government to redistribute resources towards regions in financial needs, decentralization curbs incentives for excessive subnational spending and enhances fiscal discipline, but may also widen interregional disparities by triggering tax competition for mobile tax bases. We provide a formal treatment of this trade-off, and shed light on the optimal degree of fiscal decentralization. We find that tax decentralization can be optimal even under Rawlsian social preferences which only weight the welfare of the poorest region in the federation.

Keywords: fiscal federalism; tax competition; regional disparities (search for similar items in EconPapers)
JEL-codes: H77 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-pbe and nep-ure
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