Tax Capacity Disparities and Fiscal Equalization: The Case of Spanish Local Governments

Antoni Castells, Alejandro Esteller-Moré and Maite Vilalta
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Antoni Castells: University of Barcelona & Barcelona Institute of Economics
Alejandro Esteller-Moré: University of Barcelona & Barcelona Institute of Economics
Maite Vilalta: University of Barcelona & Barcelona Institute of Economics
Authors registered in the RePEc Author Service: Alejandro Esteller-Moré ()

Public Economics from University Library of Munich, Germany

Abstract: In the absence of an equalization grant system, like we justify occurs in Spain at the local level of government, those governments that bear a decrease in their level of tax capacity will have to adjust their budget either by increasing their level of tax effort, by reducing their level of public services and/or by incurring in a deficit. By means of a dynamic panel data analysis, and using a database from municipalities of the province of Barcelona (1993-99), we describe that process of fiscal adjustment. About a 25% of the shock is internalized through an increase in tax effort, a 35% through a reduction in public expenditure (mainly investment), while the rest (40%) is covered by an increase in the level of debt (i.e., the adjustment is delayed). However, this process of fiscal adjustment is very much influenced by the political situation of the municipality. Coalition and minority governments ("weak" governments) tend to delay the (unavoidable) fiscal adjustment, and a 70% of their shock is covered by an increase in the level of debt, while the rest of municipalities ("strong" governments) adjust immediately (80% reduction in public expenditure and 20% increase in tax effort). Leftist governments tend to react mostly through increases in tax effort, while rightist governments tend to reduce public expenditure to a greater extent. Finally, we find that municipalities tend to react differently in front of a negative (28%) and a positive (26%) shock with respect to the level of tax effort. Hence, municipalities are relatively reluctant to decrease taxes.

Keywords: Fiscal Adjustment; Equalisation Transfers; Local Governments (search for similar items in EconPapers)
JEL-codes: H61 H62 H71 H72 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2003-10-23
New Economics Papers: this item is included in nep-pbe and nep-ure
Note: Type of Document - pdf; prepared on Win98; pages: 40
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwppe:0310006

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