Susana Peralta

Political Support for Tax Decentralisation

This paper presents a spatial model of a city with two unequally productive jurisdictions. City residents bear a commuting cost to work in either of the two jurisdictions. In each jurisdiction, a fixed public budget must be financed with a wage tax and a head-tax. We compare the first best optimum to tax decentralisation equilibria. From the total welfare viewpoint, tax competition is always inefficient. Inefficiency may be higher under utilitarian governments or majoritarian ones. If local governments are utilitarian, the more productive jurisdiction is better off at the first best than with tax competition, while the other is worst off. If they are majoritarian, both jurisdictions will under some conditions prefer the tax decentralisation to the first best.

Endogenous Spillovers in the Trade-off between Centralization and Decentralization

In this paper, we revisit the classical trade-o between centralized and decentralized provision of local public goods, in a setting where in- terregional spillovers depend on the level of a national public good. We compare the standard benevolent planner approach with a political econ- omy in which decisions, in a centralized system, are undertaken by a non-cooperative legislature with no separation of powers. We observe that the policy-maker in a centralized system is able to play both with local public goods and spillovers, a mechanism that is not available un- der a decentralized system. When compared to the traditional exogenous spillovers assumption, this improves the case for centralization under the standard benevolent planner approach. However, the same is not neces- sarily true in the non-cooperative legislature, as in this case the interests of the legislator do not need to be aligned with those of the society. Fi- nally, we extend the traditional political economy analysis by considering a legislature in which decisions are undertaken by di erent committees (separation of powers), and show that it performs better than the original non-cooperative legislature, greatly improving the case for centralization. JEL codes: D70, H11, H41, H70