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Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments
TL;DR: The authors used a state and local-level panel data set of Swiss cantons from 1980 to 1998 to empirically analyze the effect of different federalist institutions on the size and structure of government revenue.
Abstract: According to the Leviathan-Model, fiscal federalism is seen as a binding constraint on a revenue-maximizing government. The competitive pressure of fiscal federalism is supposed to reduce public sector size as compared to unitary states. However, empirical results concerning the Leviathan hypothesis are mixed. This study uses a state and local-level panel data set of Swiss cantons from 1980 to 1998 to empirically analyze the effect of different federalist institutions on the size and structure of government revenue. Because of the considerable tax autonomy of sub-national Swiss governments, it is possible to investigate different mechanisms by which fiscal federalism may influence government size. The results indicate that tax exporting has a revenue expanding effect whereas tax competition favors a smaller size of government. Fragmentation has essentially no effect on the size of government revenue for Swiss cantons. The overall effect of revenue decentralization leads to lower tax revenue but higher user charges. Thus, revenue decentralization favors a smaller size of government revenue and shifts government revenue from taxes to user charges.
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TL;DR: This article reviewed existing empirical evidence on the relationship between institutional rules, political representation and public policy outcomes and developed some new directions for research, presenting a small number of novel exploratory results.
Abstract: A rich array of institutional diversity makes the United States an excellent place to study the relationship between political institutions and public policy outcomes. This Paper has three main aims. First, it reviews existing empirical evidence on the relationship between institutional rules, political representation and policy outcomes. It aims to place the literature into a broader context of theoretical and empirical work in the field of political economy. Second, it develops a parallel empirical analysis that updates studies in the literature and re-examines some of the claims made, in a setting unified both in terms of policy outcomes and the period under study. Third, the paper develops some new directions for research, presenting a small number of novel exploratory results.
796 citations
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TL;DR: This paper performed an empirical investigation of the macroeconomic consequences of international terrorism and interactions with alternative forms of collective violence and found that on average, the incidence of terrorism may have an economically significant negative effect on growth, albeit one that is considerably smaller and less persistent than that associated with either external wars or internal conflict.
Abstract: We perform an empirical investigation of the macroeconomic consequences of international terrorism and interactions with alternative forms of collective violence. Our analysis is based on a rich unbalanced panel data set with annual observations on 177 countries from 1968 to 2000, which brings together information from the Penn World Table dataset, the ITERATE dataset for terrorist events, and datasets of external and internal conflict. We explore these data with cross-sectional and panel growth regression analysis and a structural VAR model. We find that, on average, the incidence of terrorism may have an economically significant negative effect on growth, albeit one that is considerably smaller and less persistent than that associated with either external wars or internal conflict. As well, terrorism is associated with a redirection of economic activity away from investment spending and towards government spending. However, our investigation also suggests important differences both regarding the incidence and the economic consequences of terrorism among different sets of countries. In OECD economies, in particular, terrorist incidents are considerably more frequent than in other nations, but the negative influence of these incidents on growth is smaller.
523 citations
TL;DR: In this article, the authors revisited the influential "Leviathan" hypothesis, which pos- its that tax competition limits the growth of government spending in decentralized countries, and they used panel data to examine the effect of fiscal decentralization over time within countries, attempting to distinguish between decentralization that is funded by intergovernmental transfers and local taxation.
Abstract: This article revisits the influential "Leviathan" hypothesis , which pos- its that tax competition limits the growth of government spending in decentralized countries+ I use panel data to examine the effect of fiscal decentralization over time within countries, attempting to distinguish between decentralization that is funded by intergovernmental transfers and local taxation+ First, I explore the logic whereby decentralization should restrict government spending if state and local governments have wide-ranging authority to set the tax base and rate, especially on mobile assets+ In countries where this is most clearly the case, decentralization is associated with smaller government+ Second, consistent with theoretical arguments drawn from wel- fare economics and positive political economy, I show that governments grow faster as they fund a greater portion of public expenditures through intergovernmental transfers+
440 citations
TL;DR: The relative strengths of vertical and horizontal tax externalities turn on the balance between the interest responsiveness of the supply of savings and demand for capital, the extent to which immobile factors are taxed by the states, and the strength of preferences between federal and state expenditures as discussed by the authors.
Abstract: The relative strengths of vertical and horizontal tax externalities turn on the balance between the interest responsiveness of the supply of savings and demand for capital, the extent to which immobile factors are taxed by the states, and the strength of preferences between federal and state expenditures. The vertical externality will dominate if the aggregate tax base of the federation is responsible to the state tax instrument. Tax interactions in federations are more complex than has often been supposed.
379 citations
TL;DR: In this article, different measures of fiscal autonomy and revenue decentralization are presented which consider tax-raising powers of sub-central governments, taking account of changes in the assignment of decision-making competencies in the course of time.
Abstract: This paper deals with the problems encountered in defining and measuring the degree of fiscal decentralization. Drawing on a recent analytical framework of the OECD, different measures of fiscal autonomy and revenue decentralization are presented which consider tax-raising powers of sub-central governments. Taking account of changes in the assignment of decision-making competencies in the course of time, new time series of annual data on the degree of fiscal decentralization are provided for 23 OECD countries in the time period between 1965 and 2001. It is shown that common measures usually employed tend to considerably overestimate the extent of fiscal decentralization. Evidence is also provided for increasing fiscal decentralization in a majority of OECD countries during the last three decades.
368 citations
Cites background from "Decentralized Taxation and the Size..."
...4See the empirical Leviathan literature, e.g., Oates (1985), or Feld et al. (2003), who also provide a survey on this literature....
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References
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TL;DR: In a general equilibrium model of a labor economy, the size of government, measured by the share of income redistributed, is determined by majority rule as mentioned in this paper, where voters rationally anticipate the disincentive effects of taxation on the labor-leisure choices of their fellow citizens and take the effect into account when voting.
Abstract: In a general equilibrium model of a labor economy, the size of government, measured by the share of income redistributed, is determined by majority rule. Voters rationally anticipate the disincentive effects of taxation on the labor-leisure choices of their fellow citizens and take the effect into account when voting. The share of earned income redistributed depends on the voting rule and on the distribution of productivity in the economy. Under majority rule, the equilibrium tax share balances the budget and pays for the voters' choices. The principal reasons for increased size of government implied by the model are extensions of the franchise that change the position of the decisive voter in the income distribution and changes in relative productivity. An increase in mean income relative to the income of the decisive voter increases the size of government.
4,696 citations
"Decentralized Taxation and the Size..." refers background in this paper
...The literature on the impact of electoral competition as an investigation of the voice mechanism starts with the median voter model explaining the observable tax system under majority rule (Romer 1975, Roberts 1977, Meltzer and Richard 1981, 1983)....
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...Follow- ing Meltzer and Richard (1981), it could be hypothesized that the lower is median as compared to average income the higher the pressure to exploit the richer minority by the poorer majority in a democracy....
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...48 CH-9000 St. Gallen Switzerland Gebhard.Kirchgaessner@unisg.ch...
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Book•
01 Jan 2000
TL;DR: The authors combine the best of macroeconomic policy, public choice, and rational choice in political science, and propose a unified approach to the field of political economics, and identify the main outstanding problems.
Abstract: What determines the size and form of redistributive programs, the extent and type of public goods provision, the burden of taxation across alternative tax bases, the size of government deficits, and the stance of monetary policy during the course of business and electoral cycles? A large and rapidly growing literature in political economics attempts to answer these questions. But so far there is little consensus on the answers and disagreement on the appropriate mode of analysis. Combining the best of three separate traditions -- the theory of macroeconomic policy, public choice, and rational choice in political science -- Torsten Persson and Guido Tabellini suggest a unified approach to the field. As in modern macroeconomics, individual citizens behave rationally, their preferences over economic outcomes inducing preferences over policy. As in public choice, the delegation of policy decisions to elected representatives may give rise to agency problems between voters and politicians. And, as in rational choice, political institutions shape the procedures for setting policy and electing politicians. The authors outline a common method of analysis, establish several new results, and identify the main outstanding problems.
3,654 citations
TL;DR: In the United Kingdom, both Scot- land and Wales have opted under the Blair government for their own regional parliaments and in Italy the movement toward decentralization has gone so far as to encompass a serious proposal for the separation of the nation into two in-dependent countries as mentioned in this paper.
Abstract: vogue. Both in the industrialized and in the developing world, nations are turning to devolution to improve the per- formance of their public sectors. In the United States, the central government has turned back significant portions of federal authority to the states for a wide range of major programs, including wel- fare, Medicaid, legal services, housing, and job training. The hope is that state and local governments, being closer to the people, will be more responsive to the particular preferences of their con- stituencies and will be able to find new and better ways to provide these ser- vices. In the United Kingdom, both Scot- land and Wales have opted under the Blair government for their own regional parliaments. And in Italy the movement toward decentralization has gone so far as to encompass a serious proposal for the separation of the nation into two in- dependent countries. In the developing world, we likewise see widespread inter- est in fiscal decentralization with the ob- jective of breaking the grip of central planning that, in the view of many, has failed to bring these nations onto a path of self-sustaining growth. But the proper goal of restructuring the public sector cannot simply be de- centralization. The public sector in nearly all countries consists of several different levels. The basic issue is one of aligning responsibilities and fiscal in- struments with the proper levels of gov- ernment. As Alexis de Toqueville ob- served more than a centuty ago, "The federal system was created with the in- tention of combining the different ad- vantages which result from the magni- tude and the littleness of nations" (1980, v. I, p. 163). But to realize these "dif- ferent advantages," we need to under- stand which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government. This is the sub- ject matter of fiscal federalism. As a subfield of public finance, fiscal feder- alism addresses the vertical structure of the public sector. It explores, both in normative and positive terms, the roles of the different levels of government and the ways in which they relate to one another through such instruments as intergovernmental grants.2
3,054 citations
Additional excerpts
...48 CH-9000 St. Gallen Switzerland Gebhard.Kirchgaessner@unisg.ch...
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TL;DR: In this article, the authors derived a test for the presence of this effect and for the over-identifying restriction they use; necessary and sufficient conditions for identification of all the parameters in the model; and the asymptotically efficient instrumental variables estimator and conditions under which it differs from the within-groups estimator.
2,812 citations