IDEAS home Printed from https://ideas.repec.org/p/ecl/stabus/1929.html
   My bibliography  Save this paper

Federalism, Taxation, and Economic Growth

Author

Listed:
  • Hatfield, John

    (Stanford U)

Abstract

We show that federalism will lead to higher economic growth. We present a model of endogenous growth where government services, funded by income and capital taxes, are a component of production. In this model a decentralized government will choose tax policy to maximize economic growth, while a centralized government will not do so. Furthermore, these conclusions hold regardless of whether the government is beholden to a median voter or is a rent-maximizing Leviathan. However, a decentralized government will under- provide a consumptive public good. Finally, we show our results are robust to imperfect capital mobility between districts and in such a model that districts with a lower total factor productivity will choose a more growth-enhancing tax policy.

Suggested Citation

  • Hatfield, John, 2006. "Federalism, Taxation, and Economic Growth," Research Papers 1929, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:1929
    as

    Download full text from publisher

    File URL: http://gsbapps.stanford.edu/researchpapers/library/RP1929.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Maurice Obstfeld, 1998. "The Global Capital Market: Benefactor or Menace?," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 9-30, Fall.
    2. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 465-490.
    3. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(2), pages 313-337.
    4. Keen, Michael & Marchand, Maurice, 1997. "Fiscal competition and the pattern of public spending," Journal of Public Economics, Elsevier, vol. 66(1), pages 33-53, October.
    5. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-1162, December.
    6. Fisman, Raymond & Gatti, Roberta, 2002. "Decentralization and corruption: evidence across countries," Journal of Public Economics, Elsevier, vol. 83(3), pages 325-345, March.
    7. Fisman, Raymond & Gatti, Roberta, 2002. "Decentralization and Corruption: Evidence from U.S. Federal Transfer Programs," Public Choice, Springer, vol. 113(1-2), pages 25-35, October.
    8. John Duggan & Mark Fey, 2006. "Repeated Downsian electoral competition," International Journal of Game Theory, Springer;Game Theory Society, vol. 35(1), pages 39-69, December.
    9. Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
    10. Willmann, Gerald, 2003. "Why Legislators are Protectionists: The Role of Majoritarian Voting in Setting Tariffs," Economics Working Papers 2003-10, Christian-Albrechts-University of Kiel, Department of Economics.
    11. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922, November.
    12. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    13. Besley, Timothy & Coate, Stephen, 2003. "Centralized versus decentralized provision of local public goods: a political economy approach," Journal of Public Economics, Elsevier, vol. 87(12), pages 2611-2637, December.
    14. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
    15. Rubinchik-Pessach, Anna, 2005. "Can decentralization be beneficial?," Journal of Public Economics, Elsevier, vol. 89(7), pages 1231-1249, July.
    16. George R. Zodrow & Peter Mieszkowski, 2019. "Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Goods," World Scientific Book Chapters, in: George R Zodrow (ed.), TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow, chapter 17, pages 525-542, World Scientific Publishing Co. Pte. Ltd..
    17. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Konrad, Kai A. & Kovenock, Dan, 2009. "Competition for FDI with vintage investment and agglomeration advantages," Journal of International Economics, Elsevier, vol. 79(2), pages 230-237, November.
    2. Kayode Olaide & Beatrice D. Simo-Kengne & Josine Uwilingiye, 2022. "Sustainable Development–Fiscal Federalism Nexus: A “Beyond GDP” Approach," Sustainability, MDPI, vol. 14(10), pages 1-37, May.
    3. Pierre Salmon, 2013. "Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?," Constitutional Political Economy, Springer, vol. 24(2), pages 87-107, June.
    4. Koethenbuerger, Marko & Lockwood, Ben, 2010. "Does tax competition really promote growth?," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 191-206, February.
    5. Konrad, Kai A. & Kovenock, Dan, 2009. "Competition for FDI with vintage investment and agglomeration advantages," Journal of International Economics, Elsevier, vol. 79(2), pages 230-237, November.
    6. Floriana Cerniglia & Riccarda Longaretti, 2013. "Federalism, education-related public good and growth when agents are heterogeneous," Journal of Economics, Springer, vol. 109(3), pages 271-301, July.
    7. Vassilis Monastiriotis & Yiannis Psycharis, 2011. "Without purpose and strategy? A spatio-functional analysis of the regional allocation of public investment in Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 49, Hellenic Observatory, LSE.
    8. Boris I. Alekhin, 2020. "Vertical Fiscal Imbalance and Regional Economic Growth," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 6, pages 39-53, December.
    9. Daniel Becker & Michael Rauscher, 2013. "Fiscal Competition and Growth When Capital Is Imperfectly Mobile," Scandinavian Journal of Economics, Wiley Blackwell, vol. 115(1), pages 211-233, January.
    10. Daniel Becker & Michael Rauscher, 2007. "Fiscal Competition in Space and Time: An Endogenous-Growth Approach," CESifo Working Paper Series 2048, CESifo.
    11. Samuel Adams & Kingsley Agomor, 2020. "Decentralization, Partisan Politics, and National Development in Ghana," Public Organization Review, Springer, vol. 20(2), pages 351-366, June.
    12. John William Hatfield & Gerard Padró i Miquel, 2008. "A Political Economy Theory of Partial Decentralization," NBER Working Papers 14628, National Bureau of Economic Research, Inc.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hatfield, John William, 2015. "Federalism, taxation, and economic growth," Journal of Urban Economics, Elsevier, vol. 87(C), pages 114-125.
    2. Boadway, Robin & Tremblay, Jean-François, 2012. "Reassessment of the Tiebout model," Journal of Public Economics, Elsevier, vol. 96(11), pages 1063-1078.
    3. Koethenbuerger, Marko & Lockwood, Ben, 2010. "Does tax competition really promote growth?," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 191-206, February.
    4. Reingewertz, Yaniv, 2014. "Fiscal Decentralization - a Survey of the Empirical Literature," MPRA Paper 59889, University Library of Munich, Germany.
    5. Andreas Kyriacou & Oriol Roca sagalés, 2009. "Fiscal descentralization and the quality of government: evidence from panel data," Hacienda Pública Española / Review of Public Economics, IEF, vol. 189(2), pages 131-155, June.
    6. Ligthart, Jenny E. & van Oudheusden, Peter, 2015. "In government we trust: The role of fiscal decentralization," European Journal of Political Economy, Elsevier, vol. 37(C), pages 116-128.
    7. Guo, Shen & Shi, Yingying, 2018. "Infrastructure investment in China: A model of local government choice under land financing," Journal of Asian Economics, Elsevier, vol. 56(C), pages 24-35.
    8. Kimiko Terai, 2008. "Interregional Disparities in Productivity and the Choice of Fiscal Regime," Working Papers 070813, University of California-Irvine, Department of Economics.
    9. Kimiko Terai, 2009. "Interregional Disparities in Productivity and the Choice of Fiscal Regime," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(3), pages 383-409, June.
    10. Marceau, Nicolas, 2008. "La concurrence entre gouvernements est-elle bénéfique?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 84(4), pages 365-390, Décembre.
    11. Aleh Mazol, 2015. "Local self-governance in the Republic of Belarus," BEROC Policy Paper Series 22, Belarusian Economic Research and Outreach Center (BEROC).
    12. Martinez-Vazquez, Jorge & McNab, Robert M., 2003. "Fiscal Decentralization and Economic Growth," World Development, Elsevier, vol. 31(9), pages 1597-1616, September.
    13. Lars P. Feld & Horst Zimmermann & Thomas Döring, 2003. "Föderalismus, Dezentralität und Wirtschaftswachstum," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 72(3), pages 361-377.
    14. Eggert, Wolfgang & Sørensen, Peter Birch, 2008. "The effects of tax competition when politicians create rents to buy political support," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1142-1163, June.
    15. Mauro, Luciano & Pigliaru, Francesco & Carmeci, Gaetano, 2018. "Decentralization and growth: Do informal institutions and rule of law matter?," Journal of Policy Modeling, Elsevier, vol. 40(5), pages 873-902.
    16. Besfamille, Martin & Lockwood, Ben, 2004. "Are Hard Budget Constraints for Sub-National Governments Always Efficient?," The Warwick Economics Research Paper Series (TWERPS) 717, University of Warwick, Department of Economics.
    17. Calin Arcalean & Gerhard Glomm & Ioana Schiopu & Jens Suedekum, 2010. "Public budget composition, fiscal (de)centralization, and welfare," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(3), pages 832-859, August.
    18. Stegarescu, Dan, 2004. "Economic Integration and Fiscal Decentralization: Evidence from OECD Countries," ZEW Discussion Papers 04-86, ZEW - Leibniz Centre for European Economic Research.
    19. Alberto Ades, 1995. "Economic Development With Endogenous Political Participation," Economics and Politics, Wiley Blackwell, vol. 7(2), pages 93-117, July.
    20. Fidel Perez-Sebastian & Ohad Raveh, 2016. "The Natural Resource Curse and Fiscal Decentralization," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 98(1), pages 212-230.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:stabus:1929. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/gsstaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.