Alejandro Esteller-Moré

Vertical income tax externalities and fiscal interdependence: evidence from the US

Concurrent taxation is a feature of many federal systems. As a consequence of this fact, the tax policy of one level of government affects the tax base of the other. This paper carries out a theoretical analysis of the interdependent tax-setting decisions of federal and regional governments, paying special attention to institutional features that characterise the U.S. federal system in practice and that formally link the taxes employed at various levels of government (i.e.: tax deductibility). The developed hypotheses are tested with data corresponding to the U.S. personal income taxes for the last decade. We find that when the federal government increases taxes, there is a significant positive response of regional taxes.

Tax Setting in a Federal System: The Case of Personal Income Taxation in Canada

In a decentralised tax system, the effects of tax policies enacted by one government are not confined to its own jurisdiction. First, if both the regional and the federal levels of government co-occupy the same fields of taxation, tax rate increases by one layer of government will reduce taxes collected by the other. Second, if the tax base is mobile, tax rate increases by one regional government will raise the amount of taxes collected by other regional governments. These sources of fiscal interdependence are called in the literature vertical and horizontal tax externalities, respectively. Third, as Smart (1998) shows, if equalisation transfers are present, an increase in the standard equalisation tax rate provides incentives to raise taxes to the receiving provinces. A way to check the empirical relevance of these hypotheses is to test for the existence of interactions between the regional tax rate, on the one hand, and the federal tax rate, the tax rate set by competing regions, and the standard equalisation tax rate, on the other hand. Following this approach, this paper estimates provincial tax setting functions with data on Canadian personal income taxation for the period 1982–1996. We find a significant positive response of provincial tax rates to changes in the federal income tax rate, the tax rates of competing provinces, and the standard equalisation rate (only for receiving provinces). We also find that the reaction to horizontal competition is stronger in the provinces that do not receive equalisation transfers.

Fiscal Transparency: (Why) does your local government respond?

Abstract Quality of governance is a key for political accountability, hence, the importance of identifying its determinants. Here, we focus on one dimension of quality of governance: fiscal transparency. Drawing on a sample of 691 Catalan municipalities (2001–7), we estimate the factors determining levels of budgetary transparency. Political competition and decentralization are the most important determinants of fiscal transparency. By contrast, budgetary variables do not appear to play any role.

A Note on Consistent Players’ Valuation

Depending on their degree of risk aversion, team managers might prefer those players who score a regular amount of points in each game of the season to those other players who, although on average do equally well or even better, are more inconsistent. However, sports statistics do not reflect consistency. To take into account this characteristic seriously, the authors propose to use the well-known welfare function of Atkinson to evaluate the performance of a player in any category of the game. To illustrate their proposal, the authors apply it to the ranking of scoring leaders in the regular 2000 to 2001season and in the 2001play-offs of the National Basketball Association and offer an indication of how to deal with the valuation of consistency in the empirical estimation of players’ compensation.

Is Income Redistribution a Form of Insurance, a Public Good or Both?

This paper is an empirical study of redistributive preferences. Our interest is what motivates net contributors to support redistributive policies. Using instrumental variable estimation and exploiting a particularity of the Spanish labour market we estimate how workers’ declared preferences for unemployment benefits spending respond to changes in the local unemployment rate. We then decompose this response into the part explained by risk aversion, and thus demand for insurance, and the part explained by the public goods nature of redistribution. Our results suggest that the declared preferences of workers for unemployment benefits spending are driven by demand for insurance rather than any public goods component. We show how these results suggest that preferences for redistribution in the form of unemployment benefits are driven by insurance considerations rather than by any public goods consideration.

Fiscal equalization under political pressures

We examine the design of fiscal equalization transfers aimed at inter-regional redistribution in a setting in which special interest groups distort the fiscal policies of local governments. Equity always calls for tax-base equalization while efficiency calls for tax-base equalization of fiscal capacities backed by strong lobby groups and for tax-revenue equalization of those backed by weak lobby groups. Hence, it is optimal to rely only on tax-base equalization if the special interest groups are similar in terms of lobbying power, whereas a mixed system is optimal if they are highly heterogeneous. Tax competition reinforces the role of tax-base, while tax exporting that of tax-revenue, fiscal equalization.

Is Decentralization Really Welfare Enhancing? Empirical Evidence from Survey Data (1994-2011)

Summary Decentralization is believed to constitute the optimal institutional arrangement for the provision of public expenditure. In contrast to centralization, it is thought to offer a better match between the provision of public services and individual preferences. We test this fundamental hypothesis propounded by the fiscal federalism literature by analyzing the process of decentralization undergone by Spain since the beginning of the 1980s. We exploit survey data in which respondents (coded according to their region of residence) are asked about their level of satisfaction with the provision of public goods. A higher degree of satisfaction is expressed when responsibility for education and health expenditure is assigned to the intermediate tier of government rather than to central government. This level of satisfaction, however, is not recorded in the case of Spains largest regions. Likewise, the simultaneous presence of tax revenue decentralization does not guarantee further welfare gains. In the case of the administration of justice—where the nature of the responsibility assigned to some regional governments is of a merely administrative nature—decentralization does not appear to have any impact on the level of satisfaction expressed.

Empirical Evidence on Tax Cooperation Between Sub-Central Administrations

The literature on horizontal tax interdependence pays limited attention to interactions in administrative policies, although they can play a large role in determining the amount of tax revenues collected. We investigate the incentives for sub-central tax authority cooperation in a decentralized context, with the aim of identifying the determinants of that cooperation. Our results are congruent with standard theory; in particular, the existence of reciprocity is essential for sharing tax information, but there is sluggishness in this process, which is partly the result of the short-sighted behaviour of tax authorities influenced by budget constraints. Hence, this is good news for the functioning of a decentralized tax administration, as in the medium-long run the gains to be made from sharing tax information are achieved.