Revenue Decentralization, the Local Income Tax Deduction, and the Provision of Public Goods
42 Pages Posted: 19 Dec 2012 Last revised: 28 Jan 2013
Date Written: December 19, 2012
Abstract
We consider a model where local and national governments both tax income and use the revenue to invest in both productive and consumptive public goods. Local governments will overprovide the consumptive public good if the local income tax is (partially) deductible. However, without full deductibility, local governments will underprovide local productive public goods. Hence, to reduce the distortions in the local governments' decisions, the national government will underinvest in both types of public goods. We also consider an alternative fiscal structure where the national government sets one national tax rate and provides transfers to the local governments: this results in lower welfare than one where local governments raise revenue independently.
Keywords: Local tax deduction, Fiscal federalism, Fiscal externality, Public good provision
JEL Classification: H21, H23, H71, H72, H77
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions
By Sam Bucovetsky and Michael Smart
-
The Incentive Effect of Fiscal Equalization Transfers on Tax Policy
-
The Fiscal Incentive Effects of the Australian Equalisation System
By Bev Dahlby and Neil Warren
-
Do Fiscal Transfers Alleviate Business Tax Competition? Evidence from Germany
By Peter H. Egger, Marko Köthenbürger, ...
-
Competing in Taxes and Investment under Fiscal Equalization
By Jean Hindriks, Susana Peralta, ...
-
Competing in Taxes and Investment Under Fiscal Equalization
By Jean Hindriks, Susana Peralta, ...
-
Efficient Revenue Sharing and Upper Level Governments: Theory and Application to Germany
By Thiess Buettner, Sebastian Hauptmeier, ...