TITLE:
Optimal Formulas for Subnational Tax Revenue Sharing
AUTHORS:
Raul Alberto Ponce Rodriguez, Ikuho Kochi
KEYWORDS:
Local Public Goods, State and Local Budget and Expenditures, Intergovernmental Transfers, Inter-Regional Externalities, Federalism
JOURNAL NAME:
Theoretical Economics Letters,
Vol.6 No.4,
August
25,
2016
ABSTRACT: We develop an analysis
of optimal formulas for subnational tax revenue sharing for two cases of
interest: when local public goods (lpg’s) show spillovers and are
inter-regional perfect and imperfect substitutes. Our analysis could be
relevant to understand the determinants of feasible competing alternatives for
the design of tax revenue sharing systems. Our study shows that: 1) Inter-regional
spillovers should be taken into account in the design of formulas for
subnational revenue sharing when lpg’s are perfect inter-regional substitutes
but should not be taken into account to supply lpg’s that are imperfect
substitutes; 2) The distribution of preferences for lpg’s and population should
be considered in formulas for revenue sharing when subnational governments
provide both lpg’s that are perfect and imperfect substitutes; 3) For local
public goods that are imperfect substitutes, the share of tax revenue is first
increasing and then decreasing with increases in the population of the district;
4) For perfect substitute-lpg’s, the share of tax revenue in the district is
increasing and concave with the district’s population; 5) The distribution of
income should not be considered in the design of formulas for lpg’s that are
perfect and imperfect substitutes. Other empirically relevant comparative analyses
are considered in the paper.