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Optimal taxation and risk-sharing arrangements in an economic federation

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  • Thomas Aronsson
  • Magnus Wikstrom

Abstract

This paper analyzes optimal taxation and risk-sharing arrangements in an economy with two levels of government. Both levels provide public goods and finance their expenditures via labor income taxation, where the tax base is responsive to the private agents' labor supply decisions. The localities are assumed to experience different random productivity shocks, meaning that the private labor supply decision as well as the choices of income tax rates are carried out under uncertainty. Part of the central government's decision problem is then to provide tax revenue sharing between the local governments. The optimal degree of revenue sharing depends on whether or not the localities-regions differ with respect to labor supply incentives. Copyright 2003, Oxford University Press.

Suggested Citation

  • Thomas Aronsson & Magnus Wikstrom, 2003. "Optimal taxation and risk-sharing arrangements in an economic federation," Oxford Economic Papers, Oxford University Press, vol. 55(1), pages 104-120, January.
    • Handle: RePEc:oup:oxecpp:v:55:y:2003:i:1:p:104-120
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    Citations

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    Cited by:

    1. Emanuel Kohlscheen, 2008. "Debt Bailouts And Constitutions," Economic Inquiry, Western Economic Association International, vol. 46(3), pages 480-492, July.
    2. Thomas Aronsson & Sören Blomquist, 2008. "Redistribution and Provision of Public Goods in an Economic Federation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 125-143, February.
    3. Granlund, David, 2005. "Sickness absence and health care in an economic federation," Umeå Economic Studies 665, Umeå University, Department of Economics, revised 13 Apr 2007.
    4. Willem Sas, 2017. "Can fiscal equalisation mitigate tax competition? Ad valorem and residence-based taxation in a federation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(5), pages 817-853, September.
    5. Thomas Aronsson & David Granlund, 2017. "Federal subsidization of state expenditure to reduce political budget cycles," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(3), pages 536-545, June.
    6. Sören Blomquist & Luca Micheletto, 2009. "Nonlinear Income Taxation And Matching Grants In A Federation With Decentralized In-Kind Transfers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 543-575, May.
    7. Blomquist, Sören & Micheletto, Luca, 2004. "Redistribution, In-Kind Transfers and Matching Grants when the Federal Government Lacks Information on Local Costs," Working Paper Series 2004:15, Uppsala University, Department of Economics.
    8. Lindahl, Erica & Westermark, Andreas, 2006. "Soft Budget Constraints as a Risk Sharing Arrangement in an Economic Federation," Working Paper Series 2006:5, Uppsala University, Department of Economics.

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