Fiscal Federalism and Tax Equalization: The potential for progressive local taxes

Hevenstone, Debra; Jann, Ben (12 April 2016). Fiscal Federalism and Tax Equalization: The potential for progressive local taxes (University of Bern Social Sciences Working Papers 19). Bern: University of Bern, Department of Social Sciences

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We construct an empirically informed computational model of fiscal federalism, testing whether horizontal or vertical equalization can solve the fiscal externality problem in an environment in which heterogeneous agents can move and vote. The model expands on the literature by considering the case of progressive local taxation. Although the consequences of progressive taxation under fiscal federalism are well understood, they have not been studied in a context with tax equalization, despite widespread implementation. The model also expands on the literature by comparing the standard median voter model with a realistic alternative voting mechanism. We find that fiscal federalism with progressive taxation naturally leads to segregation as well as inefficient and inequitable public goods provision while the alternative voting mechanism generates more efficient, though less equitable, public goods provision. Equalization policy, under both types of voting, is largely undermined by micro-actors' choices. For this reason, the model also does not find the anticipated effects of vertical equalization discouraging public goods spending among wealthy jurisdictions and horizontal encouraging it among poor jurisdictions. Finally, we identify two optimal scenarios, superior to both complete centralization and complete devolution. These scenarios are not only Pareto optimal, but also conform to a Rawlsian view of justice, offering the best possible outcome for the worst-off. Despite offering the best possible outcomes, both scenarios still entail significant economic segregation and inequitable public goods provision. Under the optimal scenarios agents shift the bulk of revenue collection to the federal government, with few jurisdictions maintaining a small local tax.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Social Sciences > Institute of Sociology
03 Faculty of Business, Economics and Social Sciences > Social Sciences

UniBE Contributor:

Hevenstone, Debra and Jann, Ben

Subjects:

300 Social sciences, sociology & anthropology

Series:

University of Bern Social Sciences Working Papers

Publisher:

University of Bern, Department of Social Sciences

Language:

English

Submitter:

Ben Jann

Date Deposited:

21 Jun 2016 10:52

Last Modified:

21 Jun 2016 10:52

BORIS DOI:

10.7892/boris.81527

URI:

https://boris.unibe.ch/id/eprint/81527

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