Working Paper: NBER ID: w14628
Authors: John William Hatfield; Gerard Padró i Miquel
Abstract: We revisit the classic problem of tax competition in the context of federal nations, and derive a positive theory of partial decentralization. A capital poor median voter wants to use capital taxes to provide public goods. This results in redistributive public good provision. As a consequence, when all public goods are provided by the central government, capital taxes and public good provision are high. The expectation of high capital taxes, however, results in a small capital stock which lowers returns to redistribution. The median voter would therefore like to commit to a lower level of capital taxes. Decentralization provides such a commitment: local governments avoid using capital taxes due to the pressure of tax competition. We therefore obtain that the median voter favors a partial degree of decentralization. The equilibrium degree of decentralization is non-monotonic in inequality, increasing in the redistributive efficiency of public good provision, and decreasing in capital productivity. When public goods are heterogeneous in their capacity to transfer funds, all voters agree that goods with high redistributive capacity should be decentralized.
Keywords: No keywords provided
JEL Codes: D72; H11; H7; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| degree of decentralization (H77) | tax competition (H26) |
| degree of decentralization (H77) | redistribution (H23) |
| high capital taxes (F38) | capital stock decreases (E22) |
| capital stock decreases (E22) | lower returns on redistribution (D39) |
| median voter (D79) | partial degree of decentralization (H77) |
| inequality increases (I14) | equilibrium degree of decentralization decreases (D59) |
| high levels of inequality (I14) | increased decentralization (H77) |
| public goods with high redistributive efficiency (H49) | decentralized provision (H77) |