The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions

24 Pages Posted: 27 Oct 2002

See all articles by Sam Bucovetsky

Sam Bucovetsky

York University - Department of Economics

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2002

Abstract

This paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments, regardless of a wide variety of differences in regional tax capacity, tastes for public spending, and population. Thus, compared to other corrective devices, equalization achieves "robust" implementation. If aggregate tax bases are elastic, however, equalization leads to excessive taxation. Efficiency can be achieved by a modified formula that equalizes a fraction of local revenue deficiencies equal to the fraction of taxes that are shifted backward to factor suppliers.

Keywords: Tax Competition, Intergovernmental Grants

JEL Classification: H7

Suggested Citation

Bucovetsky, Sam and Smart, Michael, The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions (August 2002). Available at SSRN: https://ssrn.com/abstract=343604

Sam Bucovetsky

York University - Department of Economics ( email )

4700 Keele St.
Toronto, Ontario M3J 1P3
Canada

Michael Smart (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Institute for Policy Analysis
Toronto, Ontario M5S 3G7
Canada
416-978-5119 (Phone)
416-978-6713 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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