Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment



CESifo Working Paper No. 2054

Federal Tax-Transfer Policy and

Intergovernmental Pre-Commitment

Abstract

Federal and state governments often differ in the capacity to pre-commit to expenditure and
tax policy. Whether the implied sequence of public decisions has any efficiency implications
is the subject of this paper. We resort to a setting which contrary to most of the literature does
not exhibit a perfect tax-base overlap. We show that a federal government's pre-commitment
capacity is welfare-improving. Efficiency, however, does not improve over all decision
margins. The welfare-increasing policy entails a more distorted level of public consumption.
Moreover, welfare may also improve if local governments are able to pre-commit towards the
upper level. The rationale is that although federal transfers are formally unconditional they
nevertheless entail a tax-price effect; thereby potentially counteracting incentives to engage in
a “race to the bottom” in fiscal competition among local governments.

JEL Code: H71, H23, H10.

Keywords: fiscal federalism, commitment, transfer policy, tax competition, common agency.

Marko Koethenbuerger

Center for Economic Studies and CESifo
at the University of Munich
Schackstr. 4

80539 Munich

Germany

[email protected]

I am grateful to numerous conference and seminar participants for constructive comments.



More intriguing information

1. I nnovative Surgical Technique in the Management of Vallecular Cyst
2. Benchmarking Regional Innovation: A Comparison of Bavaria, Northern Ireland and the Republic of Ireland
3. 5th and 8th grade pupils’ and teachers’ perceptions of the relationships between teaching methods, classroom ethos, and positive affective attitudes towards learning mathematics in Japan
4. ISSUES AND PROBLEMS OF IMMEDIATE CONCERN
5. AN EXPLORATION OF THE NEED FOR AND COST OF SELECTED TRADE FACILITATION MEASURES IN ASIA AND THE PACIFIC IN THE CONTEXT OF THE WTO NEGOTIATIONS
6. Measuring Semantic Similarity by Latent Relational Analysis
7. CONSUMER PERCEPTION ON ALTERNATIVE POULTRY
8. Gender and headship in the twenty-first century
9. How we might be able to understand the brain
10. The name is absent
11. ANTI-COMPETITIVE FINANCIAL CONTRACTING: THE DESIGN OF FINANCIAL CLAIMS.
12. A Multimodal Framework for Computer Mediated Learning: The Reshaping of Curriculum Knowledge and Learning
13. The name is absent
14. CONSIDERATIONS CONCERNING THE ROLE OF ACCOUNTING AS INFORMATIONAL SYSTEM AND ASSISTANCE OF DECISION
15. The name is absent
16. Fighting windmills? EU industrial interests and global climate negotiations
17. Fiscal federalism and Fiscal Autonomy: Lessons for the UK from other Industrialised Countries
18. Solidaristic Wage Bargaining
19. Cross-Country Evidence on the Link between the Level of Infrastructure and Capital Inflows
20. Psychological Aspects of Market Crashes