Advertisement

International Tax and Public Finance

, Volume 22, Issue 3, pp 376–400 | Cite as

A structural approach for analyzing fiscal equalization

  • Audun LangørgenEmail author
Article

Abstract

Many countries apply cost equalization and/or fiscal capacity equalization formulas to enable subnational governments to provide comparable service standards at comparable tax rates. This paper demonstrates how measures of expenditure needs and fiscal capacity can be derived from a structural model of local government spending and taxing behavior. The structural parameters are shown to provide the information required to implement equalization defined as a balance between the principles of horizontal equity and local autonomy.

Keywords

Fiscal equalization Horizontal equity Local autonomy Expenditure needs Fiscal capacity Structural modeling 

JEL Classification

H71 H72 

Notes

Acknowledgments

I am grateful to Rolf Aaberge, Jens Dietrichson, Magne Mogstad, Jørn Rattsø, and two anonymous referees for helpful comments. Financial support from the Norwegian Ministry of Local Government and Regional Development is gratefully acknowledged.

References

  1. Aaberge, R., & Langørgen, A. (2003). Fiscal and spending behavior of local governments: Identification of price effects when prices are not observed. Public Choice, 117, 125–161.CrossRefGoogle Scholar
  2. Aaberge, R., Bhuller, M., Langørgen, A., & Mogstad, M. (2010). The distributional impact of public services when needs differ. Journal of Public Economics, 94, 549–562.CrossRefGoogle Scholar
  3. Albouy, D. (2012). Evaluating the efficiency and equity of federal fiscal equalization. Journal of Public Economics, 96, 824–839.CrossRefGoogle Scholar
  4. Allers, M. A. (2012). Yardstick competition, fiscal disparities, and equalization. Economics Letters, 117, 4–6.CrossRefGoogle Scholar
  5. Allers, M. A., & Elhorst, J. P. (2011). A simultaneous equations model of fiscal policy interactions. Journal of Regional Science, 51, 271–291.CrossRefGoogle Scholar
  6. Angrist, J. D., & Pischke, J. S. (2010). The credibility revolution in empirical economics: How better research design is taking the con out of econometrics. Journal of Economic Perspectives, 24, 3–30.CrossRefGoogle Scholar
  7. Auten, G. E. (1974). The distribution of revenue-sharing funds and local public expenditure needs. Public Finance Quarterly, 2, 352–375.Google Scholar
  8. Bahl, R., & Wallace, S. (2007). Intergovernmental transfers: The vertical sharing dimension. In J. Martinez-Vazquez & B. Searle (Eds.), Fiscal equalization (pp. 205–249). New York: Springer.CrossRefGoogle Scholar
  9. Bird, R., & Vaillancourt, F. (2007). Expenditure-based equalization transfers. In J. Martinez-Vazquez & B. Searle (Eds.), Fiscal equalization (pp. 259–289). New York: Springer.CrossRefGoogle Scholar
  10. Boadway, R. (2004). The theory and practice of equalization. CESifo Economic Studies, 50, 211–254.CrossRefGoogle Scholar
  11. Boadway, R. (2006). Intergovernmental redistributive transfers: Efficiency and equity. In E. Ahmad & G. Brosio (Eds.), Handbook of fiscal federalism (pp. 355–380). Cheltenham: Edward Elgar Publishing.Google Scholar
  12. Boadway, R., & Flatters, F. (1982). Efficiency and equalization payments in a federal system of government: A synthesis and extension of recent results. Canadian Journal of Economics, 15, 613–633.CrossRefGoogle Scholar
  13. Bradbury, K. L., Ladd, H. F., Perrault, M., Reschovsky, A., & Yinger, J. (1984). State aid to offset fiscal disparities across communities. National Tax Journal, 37, 151–170.Google Scholar
  14. Bradbury, K., & Zhao, B. (2009). Measuring non-school fiscal disparities among municipalities. National Tax Journal, 62, 25–56.CrossRefGoogle Scholar
  15. Bradford, D. F., Malt, R. A., & Oates, W. E. (1969). The rising cost of local public services: Some evidence and reflections. National Tax Journal, 22, 185–202.Google Scholar
  16. Buchanan, J. M. (1950). Federalism and fiscal equity. American Economic Review, 40, 583–599.Google Scholar
  17. Bucovetsky, S., & Smart, M. (2006). The efficiency consequences of local revenue equalization: Tax competition and tax distortions. Journal of Public Economic Theory, 8, 119–144.CrossRefGoogle Scholar
  18. Cappelen, A. W., & Tungodden, B. (2007). Local autonomy and interregional equality. Social Choice and Welfare, 28, 443–460.CrossRefGoogle Scholar
  19. Chetty, R. (2009). Sufficient statistics for welfare analysis: A bridge between structural and reduced-form methods. Annual Review of Economics, 1, 451–487.CrossRefGoogle Scholar
  20. Dafflon, B. (2007). Fiscal capacity equalization in horizontal fiscal equalization programs. In R. Boadway & A. Shah (Eds.), Intergovernmental fiscal transfers (pp. 361–396). Washington: World Bank.Google Scholar
  21. Deaton, A. (2010). Instruments, randomization, and learning about development. Journal of Economic Literature, 48, 424–455.CrossRefGoogle Scholar
  22. Downes, T. A., & Pogue, T. F. (1994). Adjusting school aid formulas for the higher cost of educating disadvantaged students. National Tax Journal, 47, 89–110.Google Scholar
  23. Duncombe, W., & Yinger, J. (2005). How much more does a disadvantaged student cost? Economics of Education Review, 24, 513–532.CrossRefGoogle Scholar
  24. Heckman, J. J., & Vytlacil, E. (2005). Structural equations, treatment effects, and econometric policy evaluation. Econometrica, 73, 669–738.CrossRefGoogle Scholar
  25. Hines, J. R., & Thaler, R. H. (1995). Anomalies: The flypaper effect. Journal of Economic Perspectives, 9, 217–226.CrossRefGoogle Scholar
  26. Jackman, R., & Papadachi, J. (1981). Local authority education expenditure in England and Wales: Why standards differ and the impact of government grants. Public Choice, 36, 425–439.CrossRefGoogle Scholar
  27. Johnson, M. B. (1979). Community income, intergovernmental grants, and local school district fiscal behavior. In P. Mieszkowski & W. H. Oakland (Eds.), Fiscal federalism and grants in aid (pp. 51–77). Washington: Urban Institute.Google Scholar
  28. Kötenbürger, M. (2002). Tax competition and fiscal equalization. International Tax and Public Finance, 9, 391–408.CrossRefGoogle Scholar
  29. Kotsogiannis, C. (2010). Federal tax competition and the efficiency consequences for local taxation of revenue equalization. International Tax and Public Finance, 17, 1–14.CrossRefGoogle Scholar
  30. Ladd, H. F. (1994). Measuring disparities in the fiscal condition of local governments. In J. E. Anderson (Ed.), Fiscal equalization for state and local government finance (pp. 21–53). Westport: Praeger.Google Scholar
  31. Langørgen, A. (2011). Targeting public services through the unequal treatment of unequals. International Tax and Public Finance, 18, 193–213.CrossRefGoogle Scholar
  32. Le Grand, J. (1975). Fiscal equity and central government grants to local authorities. Economic Journal, 85, 531–547.CrossRefGoogle Scholar
  33. Lilleschulstad, G. (2008): Equalization of settlement pattern and size of municipality in Norway. In J. Kim and J. Lotz (Eds.), Measuring local government expenditure needs (pp. 156–165). Copenhagen: Danish Ministry of Social Welfare.Google Scholar
  34. Liu, Y. (2013). Does competition for capital discipline governments? The role of fiscal equalization. International Tax and Public Finance, 19, 1–30.Google Scholar
  35. Lluch, C. (1973). The extended linear expenditure system. European Economic Review, 4, 21–32.CrossRefGoogle Scholar
  36. MacNevin, A. S. (2004). The Canadian federal-provincial equalization regime: An assessment. Canadian Tax Paper, 109, Canadian Tax Foundation.Google Scholar
  37. Mieszkowski, P., & Musgrave, R. (1999). Federalism, grants, and fiscal equalization. National Tax Journal, 52, 239–260.Google Scholar
  38. Reschovsky, A. (2007). Compensating local governments for differences in expenditure needs in a horizontal fiscal equalization program. In R. Boadway & A. Shah (Eds.), Intergovernmental fiscal transfers (pp. 397–424). Washington: World Bank.Google Scholar
  39. Reschovsky, A., & Imazeki, J. (2003). Let no child be left behind: Determining the cost of improved student performance. Public Finance Review, 31, 263–290.CrossRefGoogle Scholar
  40. Roemer, J. E. (1998). Equality of opportunity. Cambridge: Harvard University Press.Google Scholar
  41. Rosenzweig, M. R., & Wolpin, K. I. (2000). Natural “natural experiments” in economics. Journal of Economic Literature, 38, 827–874.CrossRefGoogle Scholar
  42. Shah, A. (1996). A fiscal need approach to equalization. Canadian Public Policy, 22, 99–115.CrossRefGoogle Scholar
  43. Wildasin, D. E. (1986). Urban public finance. New York: Harwood Academic.Google Scholar
  44. Yinger, J. (1986). On fiscal disparities across cities. Journal of Urban Economics, 19, 316–337.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Statistics NorwayOsloNorway

Personalised recommendations