Working Paper: CEPR ID: DP12875
Authors: Marcel Henkel; Tobias Seidel; Jens Suedekum
Abstract: Many countries operate pronounced fiscal equalization schemes that shift tax revenue across jurisdictions. We use a general equilibrium model with multiple asymmetric regions, costly trade and labor mobility to carve out the aggregate implications of this policy. Calibrating the model for Germany, we find that it indeed delivers smaller spatial economic disparities across regions. This comes at the cost of lower national output, however, because activity is diverted away from core cities and towards remote areas with low productivity. But despite this output loss, fiscal transfers may still raise national welfare, because they effectively countervail over-congestion in large cities.
Keywords: Fiscal Equalization; Regional Transfers; Migration; Spatial Economics
JEL Codes: F15; R11; R12; R13; R23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal transfers (H87) | Smaller spatial economic disparities (R12) |
| Fiscal transfers (H87) | Lower national output (H69) |
| Fiscal transfers (H87) | Diversion of economic activity from core cities to remote areas (R11) |
| Fiscal transfers (H87) | Mitigation of congestion in large cities (L91) |
| Abolishing fiscal equalization schemes (H77) | Significant migration from less productive regions to more productive ones (R23) |
| Significant migration (F22) | Increase in national productivity (O49) |
| Significant migration (F22) | Increase in real GDP per capita (O49) |
| Abolishing fiscal equalization schemes (H77) | Increase in national GDP (E20) |
| Increase in national GDP (E20) | Worsening congestion in donor regions (F35) |