Social Sciences
8 years ago

Fiscal federation boosts local public spending and welfare in communities

Annals of Economics and Statistics
Decentralizing Taxation and Public Expenditure within a Federation
Jonathan Hamilton, Steven Slutsky

Paper Summary

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The article explores how dividing taxes and spending between central and local governments in a federation can help balance out the impact of taxes on different communities. When people buy things in nearby areas, the taxes they pay can affect both places. Depending on how much people want to buy, this impact can be good or bad. If it's good, local governments can set lower taxes than a central government would, and the central government can share tax money to boost local spending and make people happier. Even if communities are different, this sharing system can work better than just the central government collecting all the taxes.