Fiscal Equalization Under Political Pressures

IEB Working Paper N. 2015/21

37 Pages Posted: 25 Sep 2015

See all articles by Alejandro Esteller-More

Alejandro Esteller-More

University of Barcelona

Umberto Galmarini

Dipartimento di Diritto, Economia e Culture, Università dell'Insubria

Leonzio Rizzo

University of Ferrara - Faculty of Economics

Date Written: September 23, 2015

Abstract

We examine the design of fiscal equalization transfers aimed at inter-regional redistribution in a setting in which special interest groups distort the fiscal policies of local governments. Equity always calls for tax-base equalization while efficiency calls for tax-base equalization of fiscal capacities backed by strong lobby groups and for tax-revenue equalization of those backed by weak lobby groups. Hence, it is optimal to rely only on tax-base equalization if the special interest groups are similar in terms of lobbying power, whereas a mixed system is optimal if they are highly heterogeneous. Tax competition reinforces the role of tax-base, while tax exporting that of tax-revenue, fiscal equalization.

Keywords: Fiscal-capacity equalization-grants, inter-regional redistribution, tax competition, equity-efficiency tradeoff, special interest groups, lobbying

JEL Classification: H77, D72, H21

Suggested Citation

Esteller-More, Alejandro and Galmarini, Umberto and Rizzo, Leonzio, Fiscal Equalization Under Political Pressures (September 23, 2015). IEB Working Paper N. 2015/21, Available at SSRN: https://ssrn.com/abstract=2664541 or http://dx.doi.org/10.2139/ssrn.2664541

Alejandro Esteller-More (Contact Author)

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Umberto Galmarini

Dipartimento di Diritto, Economia e Culture, Università dell'Insubria ( email )

Via S. Abbondio, 12
Como, Como 22100
Italy

Leonzio Rizzo

University of Ferrara - Faculty of Economics ( email )

C.so Ercole I° d'Este 37
Ferrara, 44100
Italy

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