Tax decentralisation, the flypaper effect, and growth

Zusammenfassung

The aim of this paper is to determine a theoretical linkage between tax decentralisation and growth. For this purpose, we consider a two-tier framework of local and federal government originally developed to examine how changes in taxes and transfers affect long-term equilibrium values of consumption and capital stock. In this framework we introduce a tax decentralisation indicator, take into account the existence of the flypaper effect and specify a Cobb-Douglas form for the production technology. As a result we are able to determine the level of tax decentralisation that will maximise the long-term equilibrium per capita income. Such level depends on private and public capital productivities, the tax burden rate in the absence of decentralisation and the intensity of the flypaper effect, as we illustrate using reasonable values of these parameters. The results obtained in this paper could be empirically tested in several economies.