Working Paper Series, Department of Economics, Uppsala University
No 2004:4:
Redistribution and Provision of Public Goods in an Economic Federation
Thomas Aronsson ()
and Sören Blomquist ()
Abstract: This paper concerns redistribution and provision of public
goods in an economic federation with two levels of government: a local
government in each locality and a central government for the economic
federation as a whole. We assume that each locality is characterized by two
ability-types (high and low), and that their distribution differs between
localities. The set of policy instruments facing the central government
consists of a nonlinear income tax and a lump-sum transfer to each local
government, while the local governments use proportional income taxes and
the transfers from the central government to finance the provision of local
public goods. The purpose is to characterize the tax and expenditure
structure in a decentralized setting, where the central and local
governments have distinct roles to play, and also compare this tax and
expenditure structure with the second best resource allocation. We show how
the redistributive role of taxation is combined with a corrective role,
since tax base sharing among the central and local governments gives rise
to a vertical fiscal external effect. In addition, the central government
does not in general implement the second best resource allocation with the
instruments at its disposal.
Keywords: Fiscal external effects; nonlinear taxation; (follow links to similar papers)
JEL-Codes: D60; H21; H23; H77; (follow links to similar papers)
23 pages, March 20, 2004
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