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The Incentive Effect of Equalization Grants on Tax Collection

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  • Rodríguez Javiera Bravo

    (Research Associate at Public Policy Center, Pontificia Universidad CatÓlica de Chil, Alameda Libertador Bernardo O’Higgins 324, 3th floor Santiago 8331150, Chile)

Abstract

Equalization grants that are inversely related to collected revenue increase the marginal cost of collecting because they tax the collection itself. The main finding is evidence for Chilean municipalities that equalization grants have this incentive effect on local revenue. In order to identify this effect, we exploit that today’s collected revenue could affect grants received 2, 3, or 4 years later, as determined by the equalization grant’gs distribution formula. This formula has undergone changes in the 1990-2006 period. We find a negative relationship between the equalization grant’s implicit tax and collected local revenue, and this effect is greater when the period of time between collection and the corresponding distribution of grants is shorter and when the political coalition to which the incumbent mayor belongs has a high likelihood of winning the next election and therefore paying this implicit tax in the coming years.

Suggested Citation

  • Rodríguez Javiera Bravo, 2013. "The Incentive Effect of Equalization Grants on Tax Collection," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(1), pages 173-202, May.
    • Handle: RePEc:bpj:bejeap:v:13:y:2013:i:1:p:173-202:n:11
    DOI: 10.1515/bejeap-2012-0059
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    References listed on IDEAS

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    1. Christian Baretti & Bernd Huber & Karl Lichtblau, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(6), pages 631-649, November.
    2. Egger, Peter & Koethenbuerger, Marko & Smart, Michael, 2010. "Do fiscal transfers alleviate business tax competition? Evidence from Germany," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 235-246, April.
    3. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," Munich Reprints in Economics 20129, University of Munich, Department of Economics.
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    Cited by:

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    2. Oyarzo, Mauricio & Paredes, Dusan, 2019. "Revisiting the link between resource windfalls and subnational crowding out for local mining economies in Chile," Resources Policy, Elsevier, vol. 64(C).

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