Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2004:4: Redistribution and Provision of Public Goods in an Economic Federation

Thomas Aronsson () and Sören Blomquist ()
Additional contact information
Thomas Aronsson: Department of Economics, Postal: Umeå University, SE 901 87 Umeå, Sweden
Sören Blomquist: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

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

JEL-codes: D60; H21; H23; H77

23 pages, March 20, 2004

Full text files

wp2004_4.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Lovisa Isaksson ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2019-01-15 07:35:17.