Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments

32 Pages Posted: 15 Dec 2003

See all articles by Lars P. Feld

Lars P. Feld

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences; CESifo (Center for Economic Studies and Ifo Institute)

Gebhard Kirchgässner

Universität St. Gallen; CESifo (Center for Economic Studies and Ifo Institute)

Christoph A. Schaltegger

University of St. Gallen - CREMA

Date Written: November 2003

Abstract

According to the Leviathan-Model, fiscal federalism is seen as a binding constraint on a revenue-maximizing government. The competitive pressure of fiscal federalism is supposed to reduce public sector size as compared to unitary states. However, empirical results concerning the Leviathan hypothesis are mixed. This study uses a state and local-level panel data set of Swiss cantons from 1980 to 1998 to empirically analyze the effect of different federalist institutions on the size and structure of government revenue. Because of the considerable tax autonomy of sub-national Swiss governments, it is possible to investigate different mechanisms by which fiscal federalism may influence government size. The results indicate that tax exporting has a revenue expanding effect whereas tax competition favors a smaller size of government. Fragmentation has essentially no effect on the size of government revenue for Swiss cantons. The overall effect of revenue decentralization leads to lower tax revenue but higher user charges. Thus, revenue decentralization favors a smaller size of government revenue and shifts government revenue from taxes to user charges.

Keywords: federalism, government revenue, tax competition, tax exporting.

JEL Classification: D7, D72, H71

Suggested Citation

Feld, Lars P. and Kirchgaessner, Gebhard and Schaltegger, Christoph A., Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments (November 2003). CESifo Working Paper Series No. 1087. Available at SSRN: https://ssrn.com/abstract=478261

Lars P. Feld (Contact Author)

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-Württemberg D-79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Gebhard Kirchgaessner

Universität St. Gallen ( email )

SIAW, Bodanstrasse 8
CH-9000 St.Gallen
Switzerland
+41 71 224 23 47 (Phone)
+41 71 224 22 98 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Christoph A. Schaltegger

University of St. Gallen - CREMA ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

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