Discussion Papers,
Statistics Norway, Research Department

Abstract: Many countries apply cost-equalization and/or fiscal capacity equalization formulas to enable sub-national governments to provide comparable service standards at comparable tax rates. This paper demonstrates how measures of expenditure needs and fiscal capacity can be derived from a structural model of local government spending and taxing behavior. The structural parameters are shown to provide the information required to implement equalization according to the principle of horizontal equity.

Keywords: Fiscal Equalization; Expenditure Needs; Fiscal Capacity; Structural Modeling

JEL-codes: H71; H72 November 2012

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