Tax decentralization and public deficits in OECD countries

Baskaran, Thushyanthan (2011): Tax decentralization and public deficits in OECD countries. Forthcoming in: Publius: The Journal of Federalism

Abstract

This article explores the effect of sub-national tax autonomy and sub-national control over shared taxes on primary deficits with panel data for 23 OECD countries over the 1975-2000 period. The results suggest that sub-national tax autonomy has a U-shaped effect on primary deficits. We find that the “average” country in the sample could increase the fiscal stability of its public sector by reducing sub-national tax autonomy. There is also some indication that subnational control over shared taxes increases fiscal stability, but we obtain this result only if Belgium and Spain are included in the sample.

• Item Type: MPRA Paper
• Language: English
• Keywords: Tax decentralization, Public deficits, Fiscal instability
• Subjects: H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H72 - State and Local Budget and Expenditures; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H74 - State and Local Borrowing

References

Armingeon, Klaus., Marlène Gerber, Philipp Leimgruber, and Michelle Beyeler (2008). Comparative Political Data Set 1960-2006. Institute of Political Science, University of Berne 2008 (Database).

Bahl, Roy (1999). Implementation rules for fiscal decentralization. International Studies Program Working Paper (Georgia State University).

Baskaran, Thushyanthan. (2010). On the link between fiscal decentralization and public debt in OECD countries. Public Choice 145, 351-378.

Brennan, Geoffrey and James M. Buchanan (1980). The power to tax: analytical foundations of a fiscal constitution. Cambridge: Cambridge University Press.

De Mello, Luiz R. (2000). Fiscal decentralization and intergovernmental fiscal relations: a cross country analysis. World Development 28(2), 365–380.

Ebel, Robert D. and Serdar Yilmaz (2002). On the measurement and impact of fiscal decentralization. World Bank Policy Research Working Paper No. 2809.

Feld, Lars P. and Gebhard Kirchgässner (2007). On the effectiveness of debt brakes: the Swiss experience. In Reinhard Neck and Jan-Egbert Sturm (Eds.), Sustainability of public debt, Cambridge/London. MIT Press.

Fornasari, Francesca., Steven B. Webb, and Heng-Fu Zou (2000). The macroeconomic impact of decentralized spending and deficits: international evidence. Annals of Economics and Finance 1(2), 403–433.

Freitag, Markus and Adrian Vatter (2008). Decentralization and fiscal discipline in sub-national governments: evidence from the Swiss federal system. Publius: The Journal of Federalism 38(2), 272–294.

Goodspeed, Timothy J. (2002). Bailouts in a federation. International Tax and Public Finance 9(4), 409–421.

Hayek, Friedrich A. (1945). The use of knowledge in society. American Economic Review 35(4), 519–530.

Hooghe, Liesbet, Gary Marks, and Arjan H. Schakel (2010). The rise of regional authority: a comparative study of 42 democracies (1950-2006). London: Routledge.

Kirchgässner, Gebhard (2005). Sustainable fiscal policy in a federal state: the swiss example. Swiss Political Science Review 11(4), 19–46.

Neyapti, Bilin (2010). Fiscal decentralization and deficits: international evidence. European Journal of Political Economy 26 (2), 155-166.

Oates, Wallace E. (1972). Fiscal federalism. New York: Harcourt Brace Jovanovich.

Oates, Wallace E. (1999). An essay on fiscal federalism. Journal of Economic Literature 37(3), 1120–1149.

OECD (1999). Taxing power of state and local government. OECD Tax Policy Studies 1. Paris: OECD.

Rattso, Jorn (2004). Fiscal adjustment under centralized federalism: empirical evaluation of the response to budgetary shocks. FinanzArchiv 60(2), 240–261.

Rodden, Jonathan A. (2002). The dilemma of fiscal federalism: grants and fiscal performance around the world. American Journal of Political Science 46(3), 670–687.

Rodden, Jonathan A. (2005). And the last shall be first: federalism and soft budget constraints in Germany. Mimeo (Massachusetts Institute of Technology).

Rodden, Jonathan A. (2006). Hamilton’s Paradox: the promise and perils of fiscal federalism. Cambridge: Cambridge University Press.

Rodden, Jonathan A., Gunnar S. Eskeland, and Jennie Litvack (2003). Fiscal decentralization and the challenge of hard budget constraints. Cambridge: MIT Press.

Rodriguez-Pose, Andrés and Nicholas Gill (2003). The global trend towards devolution and its implications. Environment and Planning C: Government and Policy 21, 333-351.

Rodriguez-Pose, Andrés and Nicholas Gill (2004). Reassessing relations between the centre and the states: the challenge for the Brazilian administration.

Samuels, David (2003). Fiscal straightjacket: the politics of macroeconomic reform in Brazil, 1995-2002. Journal of Latin American Studies 35, 545–569.

Schaltegger, Christoph A. and Lars P. Feld (2007). Are fiscal adjustments less successful in decentralized governments. CESifo Working Paper Series No. 1946.

Seitz, Helmut (1999). Subnational government bailouts in Germany. ZEI Working Paper No. B 20.

Singh, Raju and Alexander Plekhanov (2005). How should subnational government borrowing be regulated? Some cross-country empirical evidence. IMF Working Paper No. 54.

Sorens, Jason (2011). The Institutions of Fiscal Federalism. Publius: The Journal of Federalism 41 (2), 207–231.

Stegarescu, Dan (2005). Public sector decentralization: measurement concepts and recent international trends. Fiscal Studies 26(3), 301–333.

Thornton, John and Armine Mati (2008). Fiscal institutions and the relation between central and sub-national government fiscal balances. Public Finance Review 36(2), 243–254.

Tiebout, Charles (1956). A pure theory of local expenditures. Journal of Political Economy 64(5), 416–424.

Tomassi, Mariano , Sebastián Saiegh, and Pablo Sanguinetti (2001). Fiscal federalism in Argentina: policies, politics, and institutional reform. Economia: Journal of the Latin American and Caribbean Economic Association 1, 157–211.

Tsebelis, George (1995). Decision making in political systems: veto players in presidentialism, parliamentarism, multicameralism and multipartyism. British Journal of Political Science 25(3), 289–325.

Vinuela, Julio (2000). Fiscal decentralization in Spain. IMF Working Paper.

von Hagen, Jürgen, Massimo Bordignon, Matz Dahlberg, Bhajan S. Grewal, Per Petterson, and Helmut Seitz (2000). Subnational government bailouts in OECD countries: four case studies. Inter-American Development Bank Research Network Working paper No. R-399.

Wibbels, Erik (2000). Federalism and the politics of macroeconomic policy and performance. American Journal of Political Science 44(4), 687–702.

Wildasin, David (1997). Externalities and bailouts: hard and soft budget constraints in intergovernmental fiscal relations. World Bank Policy Research Working Paper No. 1843.