Fiscal Equalization Under Political Pressures
IEB Working Paper N. 2015/21
37 Pages Posted: 25 Sep 2015
Date Written: September 23, 2015
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: Suggested Citation