Equalisation and Fiscal Competition

Leonzio Rizzo ()

MPRA Paper from University Library of Munich, Germany

Abstract: The paper’s aim is to link two different issues: equalization and fiscal competition. In the model there are two regions: the first one has rich citizens and the other one has poor citizens. Regional representatives in a federal Council must decide on the introduction of an equalization transfer based on fiscal capacity. Regions choose tax rates on a consumption good and the citizens choose where to buy the consumption good. We show that the existence of the transfer stimulates regions to choose higher tax rates. The economic insight for this result is that the existence of a mobile tax base generates a negative fiscal externality on each regional planner. We show that the equalization transfer presents a wider range of agreement opportunities between regional representatives to correct the inefficient levels of tax rates than a compensation transfer does. This is because efficiency gains are equalized with the introduction of an equalization transfer

Keywords: fiscal competition; equalization; transfer; externality; tax-rate (search for similar items in EconPapers)
JEL-codes: H2 H23 H7 H70 H71 H73 H77 (search for similar items in EconPapers)
Date: 2000-05
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:5335

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