Fiscal Federalism-Decentralisation and the size of government

Master's Thesis , 2015 , 57 Pages

Business economics - Economic Policy

A large number of countries are trying to improve their ability to serve their inhabitants more efficiently and more effectively. To accomplish this ambition, a reawakening of interest in the practices and in the principles and of fiscal federalism is mandatory. Questions arise such as:
- How many taxes are necessary to provide an efficient amount of local public goods?
- How should the taxes be allocated most reasonable between the different levels of governments?
- Which level of government should have how much freedom of choice concerning tax revenues and tax expenditures, or differently, which degree of decentralisation is most constructive?
Generally, two conflicting possibilities to provide an efficient level of local public goods are existing: The first one proposes a high degree of centralisation of the tax system which would lead, if the government is totally benevolent, to an efficient output of local public goods. An argument against centralisation is that a centralised system cannot serve the different needs and preferences of the inhabitants of unequal regions. The second perception states that an efficient level of local public can be provided if the system is decentralised. A possible disadvantage of decentralisation is the appearance of tax competition which may lead to an inefficient low level of local public goods. The discrepancy between these two conflictive systems is going to be discussed in this thesis.
Furthermore, politico-economic mechanisms, which are supposed to explain the correlation between degree of centralisation and size of government are introduced which leads to the research question of this thesis:
Does a decentralised tax system lead to a smaller size of government compared to a centralised tax system?
Which politico-economic mechanisms are responsible for this correlation?
In relation to these questions, different approaches are discussed, underlined by theoretical and empirical models.
The first one, a public choice approach, states that central governments operate like monopolists, or leviathans, extracting as much tax revenues from the citizens as possible. The aim is not to maximise social welfare, but to increase their control over the resources of the economy. This approach was formulated by Brennan’s and Buchnan’s Leviathan hypothesis (1980), stating, subject to the above mentioned conditions, that a higher degree of decentralisation leads to a smaller size of government. [...]

Table of Contents

1. Introduction

2. Definitions
2.1 Definition of Fiscal Federalism
2.2 Definition of Fiscal Decentralisation and Fiscal Centralisation

3. Fiscal Federalism in Austria
3.1 Decentralisation in Austria compared to other OECD countries

4. Theoretical Perspectives on Fiscal Federalism
4.1 First Generation Theory of Fiscal Federalism
4.2 Public-Choice Perspective of Fiscal Federalism
4.3 Second Generation Theory of Fiscal Federalism
4.3.1 Centralization and Decentralisation in the Second Generation Model
4.3.2 Potential dangers of Fiscal Decentralisation
4.3.3 Risk- Sharing and Interjurisdictional Insurance
4.4 Conclusion

5. Fiscal decentralisation and size of the government
5.1 Introduction
5.2 The Leviathan hypothesis
5.2.1 Empirical studies on the Leviathan hypothesis
5.2.1.1 The control variables
5.2.1.2 The original test
5.2.1.3 The inseparability of taxing and spending decision
5.2.1.4 Evidence from Swiss state and local governments
5.2.1.5 References on panel data of 18 OECD countries
5.2.1.6 References on panel data of 29 OECD countries
5.2.2 Summary and Conclusion
5.2.3 Critical assessment on the empirical tests
5.2.3.1 Conclusion
5.3 Tax competition
5.3.1 Introduction
5.3.2 Definition of tax competition
5.3.3 Tax competition and output of local public goods
5.3.3.1 Summary
5.4 Local benefits with federation-wide costs
5.4.1 Introduction
5.4.2 The model
5.4.2.1 Summary
5.4.3 A simplification of the model
5.4.3.1. Summary
5.4.4 A model of tax sharing and tax illusion
5.4.4.1 Summary
5.4.5 Conclusion

6. Conclusion

7. Literature
7.1 Articles
7.2 Internet sources

8. Equations

9. Figures

10. Tables

• Author: Ina Walcherberger (Author)
• Publication Year: 2015
• Pages: 57
• Catalog Number: V316869
• ISBN (eBook): 9783668159150
• ISBN (Book): 9783668159167
• Language: English
• Tags: fiscal, federalism-decentralisation